What happened
Shares of Alphabet (GOOGL -1.23%) (GOOG -1.10%) were sliding Tuesday as the market interpreted Snap's (SNAP -4.04%) surprise guidance cut as bad news for digital advertising stocks in general. The Google parent makes most of its revenue from advertising, and more than 100% of its profits come from it (because other units like Google Cloud and "Other Bets" lose money), so it's not surprising to see its stock falling in response to this news.
As of 12:38 p.m. ET, Alphabet stock was down 6.6%.
Image source: Getty Images.
So what
In a Securities and Exchange Commission filing Monday night, Snap said it now expects its second-quarter results will come in below its previous guidance due to the deteriorating macroeconomic environment. That warning sent shudders across the social media and ad tech industries, driving a number of stocks down by double-digit percentages. Snap itself was down by more than 40% in early afternoon trading Tuesday.
Advertising is cyclical. During periods of healthy economic growth, ad spending increases, while in recessions, companies pull back on it. It's generally one of the first budget items to get cut as the return on investment for it declines and businesses grow concerned that consumers will have less to spend.
This pattern played out in the early stages of the pandemic. Revenue growth rates at digital advertising companies slowed sharply in the first half of 2020 before rebounding in the second half. Google also saw revenue growth slow sharply in 2009 during the depths of the financial crisis.
Alphabet may be better insulated from this type of trouble than its peers because it's focused on performance marketing -- the kind of search-based clicks that are easily trackable -- and because it's more focused on the services sector. For example, it brings in billions of dollars in revenue from online travel agencies like Booking Holdings and Expedia, and the travel sector is expected to have a big rebound this summer.
Now what
Given Alphabet's price-to-earnings ratio of 19, a substantial slowdown is already priced into the stock, and the company has consistently demonstrated itself to be a reliable growth and profit machine. While Alphabet's financial results will take a hit in a slowdown or recession, there's no doubt that the company will rebound in the recovery that follows.
