Why Wall Street Is Concerned about Alphabet
YouTube issue divides Wall Street
Alphabet (GOOGL) will report its 1Q17 earnings amid sharp division on Wall Street about the company’s near-term prospects. One major contention about Alphabet’s near-term prospects revolves around YouTube, which generated negative press after it was revealed that advertisements were appearing in videos promoting hate, violence, or terrorist propaganda. Several advertisers in Europe and the United States (SPY), including Verizon (VZ), AT&T (T), and Johnson & Johnson (JNJ), pulled their ads from YouTube in protest of ads appearing next to controversial videos.
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Alphabet uses artificial intelligence to tackle the problem
Some on Wall Street believe that the YouTube debacle will impact Alphabet’s video advertising revenue because of boycotts by major advertisers impacting the company’s top line. Also, advertisers may reconsider digital advertising, creating an opportunity for traditional television companies to steal YouTube advertisers.
However, some believe Alphabet will quickly overcome the problem and restore faith in its advertising services. Alphabet is using artificial intelligence technology to ensure that ads do not appear next to contentious content.
If successful, Alphabet could be on firmer footing to take advantage of worldwide spending on digital advertising, which research company eMarketer estimates to reach $335 billion by 2020. The company estimates that global spending on digital ads was $194.6 billion in 2016.
FBN Securities analysts lowered their price target for Alphabet to $1,025 from $1,050 to reflect the impact of the YouTube issue. Instinet analysts also cut their price target on Alphabet, to $925 from $950, because of the same issue. However, most equity research companies, including FBN Securities and Instinet, maintain a “buy” recommendation on Alphabet despite the YouTube issue.
1Q17 is safe from the YouTube fiasco
Alphabet’s upcoming earnings report is unlikely to be significantly impacted by the ad boycott problem, as the issue arose at the tail end of 1Q17.