Why Did Alphabet Stock Drop on Wednesday Morning?

October 26, 2022 at 15:42 PM EDT

Alphabet stock (NASDAQ:GOOGL) fell dramatically on Wednesday, plunging as high as 9.1%. The stock was still down 7.5% as of 10:45 a.m. ET.

The IT giant’s decline impetus was its third-quarter results report, which showed the economy is worse than previously thought.

Market Analysis of Alphabet Stock

Alphabet’s sales were $69 billion, up 6% yearly (up 11% in constant currency), despite foreign currency headwinds. Its operating margin fell to 25% from 32% in the prior-year quarter, continuing a downward trend that started earlier this year. The bottom line reflected the strains of the struggling economy, as diluted earnings per share (EPS) of $1.06 fell 24%.

To put that result in perspective, analysts’ average predictions were for sales of $71 billion and earnings per share of $1.26; thus, Alphabet stock (NASDAQ:GOOGL) fell short on both counts.

Google Cloud fared pretty well in the face of macroeconomic challenges, expanding 38% year on year, pushing its run rate to roughly $27.5 billion. The main news was a significant slowdown in Google’s digital ad income, which increased by just 2.5%.

Ad expenditure on YouTube was the most obvious shift, with revenue falling to $7.07 billion, down 2% year on year and falling short of analysts’ forecasts of $7.42 billion. This is the first time that YouTube’s ad income has fallen year over year since Alphabet started disclosing the segment’s statistics in 2019.

CFO Ruth Porat blamed the slowing growth on “more pullbacks in advertiser expenditure” on the conference call to discuss the results, a remark that sent shivers through the digital advertising and ad-tech worlds.

So, what now?

Alphabet officials cautioned that the business was “lapping the outsized growth in 2021,” resulting in harsh comparisons, while also facing “greater” foreign currency headwinds and a decline in ad expenditure in the fourth quarter.

Alphabet stock (NASDAQ:GOOGL) is a buy in the long run due to its industry-leading position in digital advertising, but investors should brace themselves for a rocky ride over the next several quarters.

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