Alphabet Says It's Better Able to Weather a Recession Than It Was in 2008

Google's parent company pointed to growing revenues in YouTube and cloud as evidence that it will come out of the coronavirus pandemic stronger than before.

In an uncertain time for advertising, Alphabet is talking up its progress in other areas of the sprawling business. 

Alphabet  (GOOGL) - Get Report shares were rising 8% in trading on Wednesday morning after it posted better-than-expected revenue for the March quarter, which was the first that overlapped with the coronavirus pandemic. Management shone a spotlight YouTube and Google Cloud as well, with CFO Ruth Porat saying the two segments were key drivers in Alphabet’s 13% growth in the quarter.

“Alphabet is more resilient than the vast majority of tech companies,” wrote Daniel Elman, an analyst at Nucleus Research, in an email. “Growing antitrust concerns aside, it will be able to ride out any economic storm and come out larger on the other side due to the largely inelastic demand for Search/YouTube/Cloud services.”

Alphabet’s overall revenue for the quarter was $41.16 billion, and of that, YouTube ad sales contributed $4 billion and Google Cloud $2.8 billion. Management pointed to growing engagement with cloud services, such as G Suite, as well as enhancements to its YouTube advertising services in arguing that its outlook won't be completely beholden to economic winds. 

On a call with shareholders, CEO Sundar Pichai said that the company is in a better position to weather an economic storm than it was in the global economic crisis of 2008.

“Our business is more diversified than it was in 2008,” said Pichai. “For example, Cloud. In the public sector, we are helping governments deliver critical health and social services. We are supporting the state of New York's new online unemployment application system as it deals with the significant increase in demand.”

Pichai added that Google’s search advertising business -- its main moneymaker -- is viewed by advertisers as cost-effective and user-friendly, meaning that ad revenues won’t take long to rebound as the economy improves. Its search advertising segment still grew revenues 9% last quarter, even as the pandemic caused a “significant” slowdown in ad spending in the latter half of March, according to Porat.

“It’s pretty impressive that search was still up 9% year-over-year,” added Collin Colburn, analyst at Forrester.

Still, Alphabet’s advertising results are almost certain to get worse before they get better.

The pandemic didn’t trigger a widespread response in the U.S. and Europe until mid-March, when there were only a couple of weeks left in the quarter. But Alphabet executives described a rapid and dramatic deterioration in advertising demand once shutdowns and business closures tied to the pandemic took effect.

“In March revenues began to decline and then ended the month at a mid-teens percentage decline in year- on-year revenues,” Porat said on Tuesday, adding that YouTube advertising declined similarly in the same time frame.

That points to an ugly second quarter for advertising, which is already about a third over. For full year 2020, Forrester is forecasting an overall decline of 23% in U.S. online and offline media spend.

“Advertising revenues are still the core revenue generator for Google,” added Elman. “This could be problematic as many companies (especially small/medium-sized organizations) are freezing or slashing their marketing budgets. Likewise, many paying customers have shut down or gone out of business, which will pull revenues down.”

Alphabet is a holding in Jim Cramer’s Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells GOOGL? Learn more now.