On April 29, Google’s parent company Alphabet gave a largely positive accounting of its first quarter financial performance. The company’s earnings were hurt by a $1.7 billion European Union regulatory fine but it posted $36.3 billion in revenue and $6.6 billion in operating income. However, despite increasing its earnings by 17 percent, investors reacted negatively to the report.
By the time trading ended on April 30, Alphabet lost $70 billion in market capitalization.
Why Wall Street Punished Google
Alphabet did well in Q1 2019 by any reasonable standard, but the conglomerate still felt the wrath of its stakeholders. Wall Street’s decision to decrease Google’s value is likely due to the underperformance of its core business.
Google improved its ad business by 15 percent in the first quarter but the segment was down by five percent compared to Q1 2018. The firm also saw a year-to-year decline in its paid click rates. The division rose by 39 percent versus a 15 percent increase in the same period last year. Its annual cost-per-click monetization income fell by 19 percent despite improving five percent from Q4 2018.
Investors might feel the softness in Google’s ad segment is a significant problem because it’s Alphabet’s main source of revenue.
Google Harmful Content Crackdown Hurt Its Bottom Line
When a conglomerate as large as Alphabet loses 8 percent of its value in one day, the cause is typically multifaceted. Google being fined nearly $2 billion for corporate malfeasance was definitely a factor. The firm’s Other Bets subsidiaries also lost $868 million in Q1, a 52 percent increase from last quarter.
Alphabet CFO Ruth Porat named a leading cause of the firm’s underperformance: a decrease in YouTube’s advertising revenue. The executive explained the video sharing platform’s income fell because of modifications made to its algorithms in 2018.
Porat was likely referencing changes Google made to reduce the visibility and quantity of harmful content on YouTube. For years, the firm reaped the financial benefits of hosting fake news, conspiracy theories, and extremist videos. But as public and government scrutiny has increased, the firm introduced new tools to remove and deemphasize objectionable clips.
The conglomerate’s plunging ad rates seem to reflect its move to purge its most controversial and engaging content. In the investors call, Porat noted Google’s changes to YouTube will ultimately bear fruit as it will make the platform more appealing to big brands. The firm’s motivations are plainly financial, but a crackdown on harmful content is a net positive for humanity.
Google’s precipitous reduction in market value suggests that its investors lack both patience and empathy.
Popular Discontent is Brewing
Alphabet has more to worry about than one expensive investor tantrum. The corporation’s April 30 Securities and Exchange Commission filing included a motion arguing the conglomerate should be broken up. The Silicon Valley giant’s shareholders will discuss dismantling the near trillion dollar conglomerate at a June meeting.
The stakeholders who raised the motion argue Alphabet has become too large to manage itself effectively. The four shareholders proposed merging the company’s Class A and Class B stock. They claim the company’s current financial structure gives too much power to founders Larry Page and Sergey Brin. Together, the pair own 86 percent of the firm’s Class A shares and the voting rights that go with them.
The aggrieved group also expressed dissatisfaction with Google’s current leadership. The motion stated that the firm’s controversial dealings with China and user privacy violations have damaged its reputation and profitability.
As Facebook shareholders filed a similar motion last month looking to oust CEO Mark Zuckerberg, popular discontent seems to be brewing in Silicon Valley.