Declining Ad Rates Concern Alphabet Investors



Alphabet’s revenues

Internet giant Alphabet (GOOGL) topped its revenue estimates in the fourth quarter of 2018 and also exceeded its year-ago revenues. Revenues of $39.28 billion grew 22% YoY and increased 23% YoY on a constant currency basis in Q4 2018.

Alphabet derives a significant portion of its revenues from its advertising business. Alphabet’s ad revenues contributed 83% of the total revenues in Q4 2018.

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Revenues from ad business

In Q4, revenues from the advertising business increased almost 20% YoY to $32.6 billion. Alphabet’s revenues were also 12.6% higher than the preceding quarter. Alphabet’s peer Facebook (FB) generated ad revenues of $16.6 billion, up 30% YoY in the fourth quarter. Facebook’s ad business contributed more than 98% to Facebook’s revenues in the fourth quarter. Social media companies Snap (SNAP) and Twitter (TWTR) also generate most of their revenues from advertising.

However, Alphabet’s biggest division, Google, is struggling in the digital advertising business amid increasing competition from rival Amazon (AMZN). Amazon is increasingly focusing on the high-growth digital advertising business and has become the third-largest digital advertiser in the US after the top two players Google and Facebook. The market for the US digital video ad spending is expected to exceed $22 billion by 2021, up from $13.2 billion in 2017.

Advertising rate fell 18%

Google is also facing pressure from eroding advertising prices. Google’s advertising rate, or CPC (cost per click), which is the amount marketers pay to advertise on Google properties, fell 29% YoY in Q4 2018 and dropped 9% from the third quarter of 2018. Since advertising accounts for most of Alphabet’s revenues, declining ad rates are a serious concern for investors.


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