The ‘return of the DoJ’ hangs over Google as online ads decline

By Jon Swartz

Alphabet earnings preview: Search giant faces costs for multiple antitrust cases, but analysts expect that downturn in online advertising will hurt Google less than smaller rivals

The “return of the DoJ” could add to online advertising declines that are battering Google.

Antitrust action hangs like an albatross on Alphabet Inc.’s (GOOGL)(GOOGL) Google as it preps to announce fiscal fourth-quarter results on Thursday. The Justice Department’s lawsuit last week alleging monopolistic practices in Google’s ad-tech business is the agency’s second against the search giant, after a 2020 complaint that is scheduled for trial in September. Alphabet also faces similar charges as the most recent Justice Department antitrust suit that was levied by states, as well as antitrust claims from “Fortnite” publisher Epic Games Inc, which has also targeted Apple Inc. (AAPL)

MKM Partners analyst Rohit Kulkarni lowered his price target to $120 from $130 in a Jan. 25 note warning of “regulatory risks rising.” EvercoreISI’s Mark Mahaney likewise cautioned about the “return of the DoJ” in predicting an “overhang will continue” of legal fees and regulatory compliance expenses.

See also: Could Big Tech layoffs keep growing? Apple, Amazon, Facebook and Google may give hints in biggest week of earnings

Google’s unfolding regulatory woes have coincided with a downturn in digital-ad spending that forced massive cuts in the company’s workforce and criticism from an investor who thinks the cuts aren’t deep enough.

Yet the very thing that has Google entangled in a handful of government lawsuits — its dominance of the digital-ad market — is the dominant story line when it reports Thursday. While the online ad industry faces issues, Google is expected to push through with fewer issues than less accomplished web companies.

“Alphabet is well-positioned to capitalize on the long-term digital ad trend, participate in the shift of workloads to the cloud, and benefit from digital transformation,” Monness Crespi Hardt analyst Brian White said in a note Jan. 23. However, he warns, regulatory headwinds persist.

Read: Google and Facebook’s dominance in digital ads challenged by rapid rise of Amazon and TikTok

Analysts polled by FactSet expect Google to report total revenue of $76.18 billion and earnings of $1.18 per share, with sales expected to be in-line with last year’s results and profit declining from the holiday season a year ago. Revenue, minus traffic-acquisition costs, are modeled at $63.17 billion, which also suggests little to no growth from last year.

When executives announced the elimination of 12,000 jobs — or about 6% of its workforce — last month, Google acknowledged its hiring spree the previous few years occurred in a “different economic reality.” [During its third-quarter earnings call in late October, Google executives said they were “sharpening focus” on product and investment areas.]

For more: Big Tech layoffs are not as big as they appear at first glance

A pullback on brand advertising spending was a major factor in the decision as corporate buyers more closely scrutinize budgets. YouTube revenue in particular was punished, dropping nearly 2% year-over-year in fiscal third quarter. Google’s woes highlighted an industrywide slump that also forced layoffs at Facebook parent company Meta Platforms Inc. (META), Snap Inc. (SNAP), Twitter Inc., and others.

Still, Google is “well positioned to emerge from any prolonged advertiser pullback,” Cowen analyst John Blackledge said in a note Jan. 20 that maintained an outperform rating and $125 price target.

Google shares have declined 28% over the past 12 months. The S&P 500 index is down 10% over the past year.

-Jon Swartz

(END) Dow Jones Newswires

01-30-23 1537ET

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