Alphabet blames crypto ad spending for a drop in revenue

Google Parent Alphabet (GOOGL -3.87%) (GOOG -3.79%) has been chlorinated this year. After another round of punishment following the Q3 2022 update, shares are now down 38% this year with just two months to go until the New Year.

The last blame can be laid on a large decline in digital advertising revenue at Google. Why? Some ad buyers – specifically cryptocurrency companies – are reining in their advertising budgets.

Google blames crypto for the decline

Google’s advertising engine began to grind to a halt in the second quarter of 2022, and that trend continued in the third quarter. Google’s ad revenue was up just 2.5% from a year ago (it was up 11.6% in Q2). Many reasons were given for the decline, but Google Chief Business Officer Philipp Schindler gave this explanation on the earnings call:

Within Search and other, the biggest factor for the slowdown in Q3 was crippling the oversized results in 2021. In Q3, we saw a decline in spending from certain advertisers in certain areas of search ads. For example, in Financial Services, we saw a pullback in the insurance, loans, mortgages and crypto subcategories.

When economic uncertainty rises – as it has this year amid high inflation, rising interest rates and a war in Ukraine – banking and financial services profit margins can be an early casualty. In response, advertising activity is often cut to maintain the flow of cash to these highly sensitive companies. This time a year ago, however, everything was fine. Money was cheap (Fed interest rates were still close to 0%), inflation was still heralded as “passing”, and consumer spending was soaring fueled by government pandemic relief. Crypto and financial services companies were more than willing to shell out big bucks for ads.

All that has changed now. Due to tougher economic factors, the cryptocurrency industry in particular has been battered. Crypto prices are in the trash — Bitcoin (BTC -0.74%) and Ethereum (ETH -0.92%) prices are still down more than 50% so far in 2022. Crypto trading activity, among both consumers and institutional traders, has taken a step back, as reported by crypto platform companies that Coin base (COIN -4.08%) and Silvergate capital (SAY -6.98%). And a handful of crypto companies and investment funds have gone bankrupt.

How long will the crypto downturn last for Google? CFO Ruth Porat said on the earnings call that “in the fourth quarter, last year’s very strong revenue performance will continue to create tough financials that will weigh on year-over-year ad revenue growth.”

I guess crypto ads will also be a headwind into Q1 2023. Remember all those Super Bowl ads last year, complete with celebrity roles, implied endorsements, and a Coinbase QR code floating on the TV screen? That was in Q1 2022. Don’t expect a repeat of that at the big game in a few months.

Not just crypto headwinds, but fiat headwinds as well

I’m glad to no longer see Larry David, Tom Brady and Matt Damon pumping digital coin trading. But let’s not make crypto the only scapegoat here, because Google isn’t. In fact, it’s still betting on blockchain technology, like Google Cloud’s selection of Coinbase to power some of its Web3 development.

The biggest headwind to end 2022 won’t be cryptocurrency at all. It will actually be fiat currency – specifically the US dollar’s strong start. That creates a huge drag on international growth as Alphabet converts sales in other currencies back to the stronger dollar. This effect reduced Alphabet’s revenue growth from 11% to 6% in Q3. Exchange rates will be even more pronounced in Q4, Porat said, thanks to the Fed continuing to raise interest rates in an effort to beat inflation.

A strong dollar could be the nail in the coffin for Google’s growth a little longer. Still, Alphabet’s Google empire could still grow over time even with lower crypto ads. And as financial clouds begin to clear, Google’s crypto ad partners are likely to start showing signs of life again. Hold tight for another couple of minutes.