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Google earnings show 'some magnitude of advertiser pullback,' analyst says

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RBC Capital Markets Internet Analyst Brad Erickson joins Yahoo Finance Live to discuss Alphabet earnings, ad spending, user engagement, YouTube competing with TikTok, and the outlook for big tech.

Video Transcript

- Welcome back, everyone. Continuing our coverage of the big tech earnings this week, we've gotten much more help now joining us to break down those Alphabet earnings. Brad Erickson, RBC Capital Markets internet analyst entering the chat here. Brad, first and foremost, I want to get your takeaway from what you saw and what this kind of shapes up for the rest of what we may hear for a big tech.

BRAD ERICKSON: Yeah, so this one's pretty interesting, actually. So I think what's going on effectively is clearly, we're headed into some magnitude of an advertiser pullback. Obviously, the management spoke to it last week, sorry, last night. And then of course, Snap last week really gave us indications that that's going on.

I think at this point, where it's a little bit challenging with Google in particular is that they don't provide us really, any sort of quantitative Q3 guidance, and so we don't really know the real magnitudes. Our channel work we've been doing for the last three months suggests that about a quarter of advertisers, SMB, small and medium sized advertisers have in fact pulled back. So the magnitude is real. But we're not really going to get more fulsome indications of that until META reports tonight.

- Brad, given the concerns that we're voiced throughout the earnings call last night, are you surprised by the market reaction here?

BRAD ERICKSON: Not totally, I think there's a couple of things going on. One, obviously, the writings on the wall that we're headed into some level of downturn, right? And again, after Snap, people got really freaked out last week that the whole ad market is imploding. I think if you look at Google's results just take purely search ad revenues for Q2 alone, things looked pretty good. And so from that perspective, definitely better than feared.

Secondarily, I think as we Zoom out just from tech into the broad, say S&P 500, there's very, very few names that are such high quality that you would want to own before you'd own Alphabet. So I think those two things are kind of working for the stock here this morning.

- We heard Microsoft talk even more about what their advertising ambitions are. What do you make of this finalization of the acquisition of Xander, early partnerships, and what kind of contribution that could actually provide to the business?

BRAD ERICKSON: Yeah, so I can't speak for Microsoft obviously, because I don't cover their stock. But certainly, they're clearly looking to become a bigger player. I mean, they started this years ago with the acquisition of LinkedIn, which their business has done tremendously well, we think, through COVID. And then obviously, yeah, with the acquisition of AppNexus and Alexander, certainly getting themselves into more in the ad tech space here going forward.

So yeah, it could definitely be a share gainer. I think the debate has always been 70% of the ad market is kind of the walled gardens, right? The Googles, the Facebooks of the world. 30% is what's referred to more as the open internet. So obviously, where trade desk a name, you mentioned earlier, tends to play. Certainly, I think the view is that they can gobble up more share, and potentially drive more share in that 30% bucket here going forward.

- And Brad, interesting nugget on Alphabet. So buybacks were $15.2 billion in the second quarter. That was the highest ever for a quarter, up from $13.3 billion in the first quarter. What signal is that sending to you?

BRAD ERICKSON: Clearly, management thinks the stock's undervalued. But I think more importantly, just longer term, it highlights the fact that this management team is clearly very committed to returning capital to shareholders. This business generates a ton of cash, and we think we'll generate even more cash in the future. So yeah, I think just easily signifies that this management team is going to remain committed to lowering that share count returning capital to shareholders.

- With regard to Alphabet, they had talked a lot about YouTube and the time spent on the platform trying to give more metrics about how it's competing with its offerings from YouTube TV all the way into the ability to have more people spend time on shorts. And so with all of that in mind, it's everybody is still chasing after that new type of consumer that is spending more time and engaging more on TikTok. And so what's the best way forward for YouTube to be able to be that contributor to Google or to Alphabet that it needs to be in this broader competitive landscape?

BRAD ERICKSON: Yeah, it's interesting that there's definitely a shift going on, not just on user engagement, but I think in the future as to how advertisers will monetize through that new surface, which we call short form video, which is what TikTok sort of invented and then now everyone's trying to do their own replication of it. I think where Google is especially probably well positioned long-term, we can talk near term. But longer term, Google is pretty well positioned in that.

They came out with this product called Performance Max. Basically what Performance Max is is you're an advertiser, you don't quite exactly know where you're going to optimally spend your ad dollars, but you're effectively leveraging Google's AI to distribute your ad dollars across search, across YouTube, across YouTube Shorts. I think we're still sort of in discovery phase, the ad industry is in discovery phase is around short form video.

TikTok is clearly capturing the hearts and minds of America's youth increasingly. But secondarily, advertisers don't still quite understand how content will monetize on in a short form environment as opposed to stories or a newsfeed where they have a lot of history over the last decade. So I think that's still very much in a discovery process, but we do believe over the longer term between Google's 1P data as well as options like Performance Max, I mentioned earlier. They're going to be really well-positioned to sort of efficiently allocate as many of those dollars as possible.

- I think I'm in the wrong gig, Brad, and I should be creating cat videos for TikTok. But we'll take that offline. Brad Erickson, RBC Capital Markets internet analyst. Good to see you.