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Alphabet Q4 Earnings Preview: Did Supply Chain Issues Reduce Advertising?

Motley Fool - Fri Jan 28, 5:50AM CST

Alphabet(NASDAQ: GOOGL)(NASDAQ: GOOG) is scheduled to report fiscal 2021 fourth-quarter earnings on Tuesday, Feb. 1. The tech giant is home to Google Search and YouTube, primarily relying on ad revenue.

In the past two years, marketers have had to manage rapidly evolving business conditions. At the pandemic onset, ad spending decreased substantially as businesses preserved cash. Recently, many companies are ramping marketing spending back up. However, the recent COVID surge driven by omicron cases is hurting supply chains which could lead to certain marketers pulling back on advertising once again. Here's what investors should look for in Alphabet's earnings release on Tuesday.

A group of people looking at a laptop.

Image source: Getty Images.

Supply chain bottlenecks are causing advertisers to pull back

Alphabet's revenue surged in the third quarter ended Sept. 30, 2021. Overall sales of $65 billion were 41% higher than the same quarter the year before. Google Search is still the dominant ad revenue machine for Alphabet. In Q3, Google Search brought $37.9 billion in ad revenue, while YouTube did $7.2 billion in ad sales. Advertisers came out in full force as economies reopened, driven by their need to remind consumers they are open for business. That's an excellent rebound for Alphabet, which -- like many businesses -- experienced a deceleration in growth in 2020. Alphabet has increased revenue at a compound annual growth rate of 20.1% in the last decade but saw the rate decline to 12.8% in 2020.

The rise of the omicron variant and supply chain disruptions could cause sales growth to decelerate. After all, there is no need for a business to advertise if it has difficulty meeting current customer demand. Already, in the quarter completed Sept. 30, Alphabet reported decreases in advertising from the auto industry. Supply chain bottlenecks have hampered auto production, and dealerships with low supply are barely meeting demand as is.

Since the pandemic onset, management has observed the ebb and flow of shopping habits and is working with marketers to offer better solutions for their needs. Consumers search online before leaving their homes for traditional in-person shopping. Alphabet is capitalizing on this trend by making it easier for businesses to show the local services they offer across Google Search and maps. Further, consumers appreciate the convenience offered by businesses with an omnichannel (online and brick-and-mortar) presence. To take advantage of the latter trend, Alphabet has created local inventory ads that highlight which products are in stock and where.

During the Q3 earnings call, Google Senior Vice President Philipp Schindler said:

Omnichannel, I talked about it, is definitely in full force. I said this earlier. We've been really focused on building features and solutions to help retailers, large and small, succeed here. And we think this will continue as the world reopens and shoppers fluctuate between online and in-store based on whatever is really more convenient.

What's next for Alphabet investors?

Analysts on Wall Street expect Alphabet to report revenue of $72.03 billion and earnings per share of $27.41. If it meets those projections, it would see year-over-year increases of 26% and 22%, respectively. Furthermore, the revenue growth rate would be a deceleration from the third quarter but still above its long-run trend.

Alphabet's stock is down 11% year to date in 2022, although it's hard to discern how much of that decrease is due to sentiment that the company has declining prospects. Investors are moving out of growth stocks recently, which is certainly one cause for the drawdown in Alphabet's stock. If the company reports increasing hesitancy by advertisers, it could cause further selling in Alphabet stock in the near term, but long-term investors should expect Alphabet to eventually bounce back and return to sizzling growth.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Parkev Tatevosian owns Alphabet (C shares). The Motley Fool owns and recommends Alphabet (A shares). The Motley Fool recommends Alphabet (C shares). The Motley Fool has a disclosure policy.