Alphabet (GOOG -1.31%) (GOOGL -1.42%), like several other technology companies, faces a bout of macroeconomic headwinds that are causing a slowdown in revenue growth. To prepare for leaner times, Alphabet announced it would be more prudent with its financial resources.
Indeed, Alphabet said it would slow hiring and pause investments in all but its core categories. Alphabet derives most of its revenue from advertisers who understandably will pull back on spending as macroeconomic uncertainty rises.
Alphabet is taking a cautious approach
Interestingly, marketers spent $763 billion on advertising in 2021, 22.5% higher than in the prior year. The figures from 2022 have yet to be released, but all indications show that growth will be slower or perhaps in the negative numbers. The Russian invasion of Ukraine has left many Europeans worried about the fallout effects. As consumers save more to prepare for the worst-case scenario, businesses are reducing advertising until they know more about how customer spending will change.
In Alphabet's most recent quarter, which ended on March 31, revenue increased by 23% from the year before. That was a slowdown from the 34% rate of growth it achieved in the same quarter last year. When the company reports second-quarter results, it will not be surprising to see revenue growth still slow. Management noted in a regulatory filing that it was not immune to economic headwinds, crediting the idea that advertisers are decreasing spending.
To counter these trends, Alphabet said it would slow the pace of hiring for the rest of the year. Still, it's a bit curious that Alphabet is taking this strategy. With $134 billion in cash and equivalents on its balance sheet and only $14.8 billion in long-term debt, Alphabet's financial position has fortress-like strength. Besides its excellent balance sheet, Alphabet is highly profitable. The company reported an operating profit margin of 31% in 2021.
The company could have otherwise decided to get aggressive at this time when its rivals are pulling back on growth investments. The competition for engineers has been notoriously tough over recent years, so this could have been an opportunity for Alphabet to gain traction on this front.
Alphabet investors can expect slower growth in the near term
A resolution to the invasion of Ukraine seems nowhere in sight. What's more, the other significant macroeconomic headwind of rising inflation shows no signs of easing. The Bureau of Labor Statistics reported that the Consumer Price Index rose 9.1% in June from a year earlier. Until these factors abate, advertisers are likely to restrain spending.
Alphabet investors should expect the company's revenue growth to be muted for the remainder of this year and perhaps several quarters beyond. That said, it's no reason to sell the stock, which is already down 26% on the year and trades inexpensively. And after the company's stock split becomes effective, its valuation levels will shift even lower.