In Google’s most recent quarterly earnings release, they missed targets for ad revenue growth. Still wildly profitable, Alphabet Inc (Google’s parent company), experienced a surprising slowdown. Advertising sales grew at the slowest rate since 2015. Management had no clear explanation why, with investors accusing the company of having a “botched” earnings call “littered with evasive commentary.”
The slowdown isn’t surprising to common sense investors, of course. The entire advertising industry experiences only moderate growth each year. The two largest online advertising networks, Google and Facebook, have experienced rapid growth but rapid growth eventually becomes harder to sustain. To use easy math, a 30% increase on $10 million is $3 million but a 30% increase on $10 billion is $3 billion. It doesn’t take a lot of analysis to realize that it’s easier for a company to find $3 million than it is $3 billion. Double digit growth eventually has to run out of room, or else the companies in question would take over the entire economy (not possible).
Google’s management blamed currency fluctuations and unspecified product changes for the slowdown. Investors have punished the company, pulling the stock price from near $1,300 a share to under $1,200 a share.
The truth is that Google is running out of room to maintain unusually high levels of growth. At the time of this writing, the company’s market capitalization was approximately $812 billion. To just match average market performance (which would make investors very unhappy), the company would need to add $81 billion to their valuation in 2019. That’s an incredible amount of money.
The rest of us should be worried. Management can’t and won’t take the slowdown lightly. Third-party networks depending on Google for revenue should be nervous. Google’s growth has, in part, been driven by increasing margins on their owned and operated properties as profit margins on network members (usually content sites that can choose to join the network and display Google ads on their sites) has been declining. The featured photo on this article shows the history of that change; bear in mind that Google went public in 2004. What does this mean for the average site owner? Google will continue to try to keep traffic off your website and within their owned and operated properties. The company will also continue to undertake efforts to monetize different products in new ways – a phenomenon we’ll cover in the next few articles.