Google’s Q1 was a $70 billion disaster that analysts say is the reality-check it needs to finally make a big change (GOOG, GOOGL)

Alphabet‘s stock is sliding after its investor call on Monday showed a slowdown in advertising revenues.
But just why its ads business stalled in the first quarter of the year remains a mystery to Wall Street due to the company’s notoriously barebones balance sheet.
James Lee, a Managing Director at Mizuho Securities, speculated that the product changes slowing growth likely came from YouTube — as the company has been working modifying its algorithms to remove harmful content.
Colin Sebastian, a Senior Research Analyst at Baird Equity, noted that reasons for Google’s sluggish ad quarter could also include increased competition, regulation, and disruptive technologies.
Also, some analysts are saying that the lack of transparency Google gives to its investors could be a potential reason itself as to why the company’s stock may be dragging.
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Google left investors with more questions than answers after its Monday conference call about weak Q1 results.

And for frustrated shareholders, the reaction has been to sell first, and try to make sense of Google managers’ vague comments later.

Shares of Google-parent company Alphabet plunged more than 8% on Tuesday, wiping out more than $70 billion in market value. According to the Wall Street Journal, this would represent the stock’s worst performance in ten years.

The tech giant’s ad revenue grew by only 15% year over year in the first three months of the year, compared to over 24% in the same period the year prior. Alphabet’s overall net revenues (excluding traffic acquisition costs) were $29.48 billion, below the $30.04 billion that analysts expected.

Executives on the call — Alphabet CFO Ruth Porat and Google CEO Sundar Pichai — gave a variety of explanations for the slowdown, including currency exchange rates, YouTube user engagement and nebulous references to "changes" to its ad products. But executives declined to provide specifics about the product changes, including such basic details like which products the changes involve and why the company is making the changes.

Alphabet’s notoriously barebones income statement — which doesn’t break out any of its businesses beyond advertising — has left Wall Street analysts scratching their heads as they to figure out what’s going on and grumbling about the company’s tight-lipped attitude.

A blip or a new reality?

The big question is whether the ad slowdown reflects a fundamental change to Google’s business, perhaps due to increased competition or shifting economics, or whether it’s merely a one-time blip with no long-term significance.

Google executives repeatedly stressed the latter during the conference call, citing the unspecified product changes as the culprit.

"The timing of product changes in ads at times can have an impact on year-on-year growth rates," Porat said on the call. "We will continue to make changes with a focus on the long-term best interest of users and advertisers."

James Lee, a Managing Director at Mizuho Securities, speculated that the product changes slowing growth likely came from YouTube — as the company has been working modifying its algorithms to remove harmful content. YouTube has been under fire as of late for its part in spreading misinformation and potentially dangerous content, especially after a Bloomberg report earlier this month cited former employees who said moderation at the company was sacrificed for higher product engagement.

Having stricter restraints could hurt short-term metrics, but according to Lee, the decision could help YouTube win back favor from advertisers in the long run.

Getty / Justin Sullivan

"We do not believe the YouTube algorithm change is a structural issue and the growth rate should rebound once the change is normalized and advertisers’ confidence returns," Lee wrote in his investor note on Monday.

‘Google is falling out of favor’

But there are plenty of other plausible factors that could be crimping Google’s revenue growth.

Colin Sebastian, a Senior Research Analyst at Baird Equity, noted that reasons for Google’s sluggish ad quarter could include increased competition, specifically from Amazon — a relatively new player in the digital ad market, but a company that’s been gaining significant momentum.

Sebastian also mentioned increased government regulations (like GDPR in the European Union) and shifts to new computing platforms, such as voice and visual search, could also be having an impact on Google’s business.

Still, because of the lack of transparency, Google provides its investors, analysts are left to speculate. And after Monday’s call, that lack of granularity seems to have shifted from an annoyance to Wall Street, to a potential reason itself as to why the company’s stock may be dragging.

Sebastian writes that "we view the lack of specificity around product changes as a new overhang, with investors already somewhat concerned about the impact of competition, regulation, and disruptive technologies."

Managing Director at Wedbush Securities, Michael Pachter, told Business Insider on Tuesday that "Google is falling out of favor with investors because of lack of transparency. If management offered more specific metrics, such as actually breaking out YouTube, I think the stock would rally hard."

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Source: Business Insider – nbastone@businessinsider.com (Nick Bastone)