Google parent Alphabet Inc on Tuesday reported first-quarter revenue below expectations as YouTube sharply missed Wall Street targets and ad sales overall were pressured by the war in Ukraine and supply-chain and inflation concerns.
The war in Ukraine that began during the quarter had an "outsized impact" on YouTube revenue because the company stopped ad sales in Russia and brand advertisers, particularly in Europe, pulled back on spending, Alphabet Chief Financial Officer Ruth Porat told analysts.
She also reported moderating growth in sales to direct-response advertisers on YouTube, and she added that cuts to app store fees to address competition concerns had wiped out gains in subscription revenue.
The world's largest provider of search and video ads has been a big winner of the shift to online commerce over the past two years, but the war and the latest economic phase of the pandemic are delivering new challenges.
Google overall derived 1% of its sales in 2021 from Russia, Porat said.
Some advertisers are rethinking ad spending amid elevated interest rates, higher transport costs and shortages of products from couches to cars to infant formula, analysts said.
Alphabet shares were down 4.9% in after-hours trading.
"Alphabet has been seen as one of the most insulated companies in the advertising space relative to peers, but sometimes you can still own the best house in the worst neighborhood," said David Wagner, portfolio manager at Aptus Capital Advisors.
YouTube advertising sales of $6.9 billion missed Wall Street's target of $7.5 billion, according to FactSet.
Alphabet said first-quarter sales were $68.01 billion, 23% higher than last year but below the average estimate of $68.1 billion among financial analysts tracked by Refinitiv, its first miss since the fourth quarter of 2019 before the pandemic. Alphabet's total costs also increased 23%.
Analysts said Google's ad sales were in line with expectations overall, but that YouTube's advertising growth was less than expected. Cloud sales grew at a slower pace than a quarter ago, and Google's "other" revenue, which includes app, hardware and subscription sales, were $6.8 billion, below estimates of $7.3 billion.
Last week, Snap Inc warned that inflation, labor shortages and other economic challenges could pressure ad revenue.
Facebook parent Meta Platforms Inc, the second-biggest online advertising platform with an expected 21.4% share of the global market in 2022, reports earnings on Wednesday. Its shares fell 3.3% on Tuesday after Alphabet's results.
Google is expected to grab 29%, or the leading share, of the $602 billion global online ad market in 2022, at least the 12th straight year it has been on top, according to Insider Intelligence.
Product changes by Google to resolve antitrust concerns and rising competition from companies such as Amazon.com Inc and ByteDance's TikTok are chipping away at ad sales. Google also cut advertising offerings and other services in Russia following the invasion of Ukraine during the first quarter.
Still, travel and entertainment advertisers are ramping up again, and it is better positioned than rivals to withstand economic shocks because Google's advertising tools tend to be among the last abandoned by advertisers as they are well known, easy to use and reach more users than alternatives.
Quarterly profit was $16.44 billion, or $24.62 per share, missing expectations of $25.76 per share.
Though Alphabet shares were down over 17% this year entering Tuesday, they have risen nearly 90% over the past two years.
Alphabet bought back over $81 billion in shares over the last two years and on Tuesday said its board had authorized an additional $70 billion in repurchases.
High on the list of risks faced by the company are numerous lawsuits and investigations into whether Google has engaged in anticompetitive conduct through its advertising and other businesses.
The newest scrutiny has been on its pending $5.4 billion acquisition of cybersecurity services provider Mandiant, which the U.S. Department of Justice is reviewing closely. Google has said it still expects to close the deal this year.Google Cloud, the unit that would contain Mandiant, increased revenue in the first quarter by 44% compared with a year ago to $5.82 billion.