Alphabet Slips As Controversy Moves More Big-Name Ad Buyers To Sideline
Alphabet (GOOG) is underperforming the market amid the seemingly growing backlash against flaws in its automated ad placement technology, which research firm Bank of America Merrill Lynch warned Thursday could weigh on the Internet titan's next few quarters.
BACKGROUND: On February 9, Britain's The Times published a report alleging that "brands are unwittingly funding Islamic extremists, white supremacists and pornographers" through automated ad placements, particularly in YouTube content. As discussion on the topic grew, ad agency Havas as well as the British government itself announced plans last week to pause spending on Google's network, and other U.K. businesses soon joined the growing boycott. Google quickly responded with new policies designed to increase client safety, but the controversy crossed the Atlantic on Wednesday with news that AT&T (T), Verizon (VZ), Johnson & Johnson (JNJ) and Enterprise Rent-A-Car were putting much of their spending with Google on hold.
BOFA WARNS OF NEAR-TERM IMPACT: Wading into Google's ad troubles, Bank of America Merrill Lynch analyst Justin Post argued Thursday that the growing advertiser boycott is "raising concerns" about Q1 and Q2 revenue strength as well as the future of programmatic advertising. The "cascade" of client pullback over the past week is "notable," Post says, adding that he "would not be surprised" to see more brands pausing their Google spend. Moreover, the company's promise of various corrective actions "will reduce the overall available advertising inventory in the Google Display Network and on YouTube," though the analyst doesn't believe ad load is at capacity and says any long-term impact will "likely" be limited. Noting that YouTube and Google Display Network together account for nearly 25% of Alphabet's revenue, Post says he expects "many advertisers" to return to Google over the next few months as the company improves controls, but warns that it could take "several quarters" for spend levels to return to normal. The analyst reiterates a Buy rating and $1,025 price objective on the stock.
PRICE ACTION: Class A shares of Alphabet are down 1.25% to $839.20 in afternoon trading, underperforming a relatively flat market.
Disclosure: None.