I want to write a quick response to the $GOOG ad revenue miss. This is what I can tell you, from a tech analyst perspective. Big fines, such as the $5 billion and $1.7 billion fines that $GOOG is facing from EU and the $3-$5 billion fine that Facebook is facing from FTC result in one important thing that Wall Street seems to not understand. These fines result in changes to the business model because the current business model is not legal for either an existing regulation or a regulation that will soon be enacted. Any changes to these cash-efficient business models will affect earnings. The fine print on these changes is nearly impossible for a financial analyst to interpret. This is one area I come in handy as the financials look great while the risks can often be completely unknown to the market.
I haven't had time to look into the line items on Alphabet's ad revenue - I'll catch up on this soon. About three weeks ago, I wrote on FATrader that changes were coming for Alphabet's third party ad revenue. Also, because Alphabet wants to be a big player in artificial intelligence, they would be smart to pivot soon to a privacy model. AI will drive tech over the next 10 years while ads are increasingly coming under regulation.
One thing I want to emphasize, is that Alphabet has demonstrated they will do the right thing, when necessary. They disclose all proper line items for analysis and they are likely to give investors a slower warning on a revenue miss. I'm obviously contrasting this to social media companies, which give little warning, insist their business models will remain intact, and are very prone to sudden stock drops.
To summarize - yes, earnings were amazing for ad companies this quarter. But that's the issue (again, investors are missing the point). This ad revenue is surging because it's being driven in ways that don't comply with privacy. The ways that Google, Facebook, Twitter, Snap and Amazon use data are completely unprecedented - other industries have come under regulations such as HIPAA with health care.
There will be changes coming across all ad companies - Google was the first to show these signs. Big reward comes with big risk is the theme for first-party ad-tech companies - especially in 2020 as California's privacy laws go into effect.
Here's the link to what I wrote previously on FATrader: https://www.fatrader.com/members/atchat/?roomId=4833
Alphabet Stock: Keep a Close Eye on Third-Party Ads
Data privacy will be affecting stocks into the near future and will likely catch Wall Street off guard as the minutiae is hard to sift through. Alphabet’s data machine has the longest tentacles of any company on the public market today, yet Facebook continues to carry the headlines. There are specific reasons that Alphabet has done a much better job at handling data, which in turn, creates a safer stock for investors. Even if some of the Google’s data collection policies are at odds with privacy advocates, Alphabet is being more transparent through SEC filings and offers a disclosure around revenue sources.
Last week, there was an important insider leak reported in Adweek that Google is “contemplating a number of changes to its consumer -and advertiser-facing tools.” Criteo’s stock dropped 30% when the news broke and TradeDesk saw a 15% drop while Alphabet’s stock showed the least impact at 5%. I believe this market reaction, which penalized Alphabet the least, is due to a misunderstanding around the implications of third-party revenue for Alphabet.
This analysis will break down why the intel leaked to the ad industry late last month is important for Alphabet stock investors to pay attention to.
Read more: https://www.fatrader.com/members/atchat/?roomId=4833