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Google: 'The economic downturn is impacting ad spending overall,' analyst says

Morningstar Senior Equity Analyst Ali Mogharabi joins Yahoo Finance Live to assess Google's earnings report, looking at digital advertising spending and revenues from YouTube and cloud services.

Video Transcript

SEANA SMITH: All right, we want to go get more on Alphabet earnings. Taking a look at how the stock is reacting, shares still off, I think, after hours. We want to bring in Ali Mogharabi. He's Morningstar's senior equity analyst. And Ali, when you take a look at Alphabet shares here, off just around 5%, what do you make of this report?

ALI MOGHARABI: Yeah, it's, to a certain extent, it was disappointing. What I would point to is mainly the YouTube ad revenues. It was actually a decline year over year. Part of that, of course, was the foreign currency headwinds, or foreign exchange headwinds. But that's a little bit disappointing. On the bright side, of course, the Cloud side of the business is doing very, very well. Their rate of growth, I think, was a little bit higher than what Microsoft reported earlier.

So I think what you're basically seeing is with the economic downturn, a lot of advertisers are becoming more hesitant. They're maybe holding back a little bit on their ad spending. But at the same time, even during an economic downturn, you're seeing the importance of that digital transition of that cloud migration, which continues to happen from, which, of course, we've seen Microsoft and Google up to now benefit.

DAVE BRIGGS: What's your reaction to the cloud number?

ALI MOGHARABI: I think it was pretty impressive. I think the market had expected a little bit more of a slowdown in terms of growth. But the growth was still very, very, very strong. And again, as I said before, I think what that really indicates is that even with an economic downturn possibly coming along, the businesses continue to see that long-term cost savings, with regards to migrating to the cloud.

SEANA SMITH: Ali, when you take a look at some of the comments here from Sundar Pichai in this report, working to realign resources to high growth, sharpening focus on a clear set of priorities, to you, what do those priorities include?

ALI MOGHARABI: I think it includes further monetization or more effective motenization of YouTube. They've launched YouTube Shorts. And some of those viewing numbers are actually pretty impressive. But in terms of attracting the advertisers to that ad inventory that YouTube Shorts continues to increase, or I should say, create, they're probably having a little bit of difficulty on that front. So I think what they need to focus on or what they are probably planning to focus on is the main side of the business, which is advertising. Lets monetize the huge user base that we have even more effectively.

Search, of course, continues to do well. So that's not an issue. And then the other one, of course, is let's continue to diversify our business as consistently and as effectively as we have the last few years, which is, push for further cloud business growth and continue to attract enterprises onto the platform.

DAVE BRIGGS: Seana talked about what Sundar Pichai said today. But rewinding back to what he said about a month ago about the company needing to become 20% more productive kind of looms over this report. How do they get there?

ALI MOGHARABI: Yeah, I think a few ways. One, of course, is to slow down increase in that headcount they have. Another one is-- which we've seen historically with a lot of technology companies. One thing to keep in mind is that the technology industry is very disruptive. So companies that continue to dominate the markets that they're in, such as an Alphabet or a Google, still need to invest in innovation coming up with new ideas, possibly new business models.

So I think one part of this change in strategy would be, let's, again, as I mentioned before, focus more on what is currently working and what we're ahead of, which is the advertising side of the business, and of course, the cloud side. So you could see less R&D on innovation or on products and/or business models that probably won't be generating revenue, nor, of course, within the next five to seven years. So taking those steps, I think, will allow them to operate a lot more efficiently, and of course, will necessarily push them to continue to increase headcount at the rates they have during the last five years.

SEANA SMITH: So Ali, here we are, after-hours, the stock now trading right around 98.14 if it does, in fact, open where we are trading after these results. You have a fair value in the stock at 169. What needs to happen in order for Wall Street to get more on board here with Alphabet's new vision?

ALI MOGHARABI: Well, it's-- I think for Alphabet specifically, it's more of a macro issue. So again, as I mentioned, the economic downturn is impacting ad spending overall. And of course, these days, most of it is digital ad spending. So I think this name requires a little bit of patience. But in terms of remaining a cash cow, continuing to remain profitable, and of course, making headway on the B2B side of the business, which is cloud, I think they continue to do very, very well.

DAVE BRIGGS: Questions for the call if you had one?

ALI MOGHARABI: Sure. What I would ask is that-- is-- what I would be interested in is YouTube Shorts actually impacting engagement time on regular YouTube. And the reason I'm asking that is because management of Snap said that earlier last week. So it would be interesting. And if that's the case, then we should expect Google to even more aggressively try to monetize YouTube Shorts and/or, of course, sell the ad impressions that they continue to generate.

SEANA SMITH: Ali, I know you mentioned some of those macroeconomic headwinds here. A strong dollar-- we've heard that from a number of companies here. How big of a headwind do you think this is specifically for Alphabet?

For the short to-- for the short to medium-term, it is a headwind. I mean, there's no question. Again, ad spending is dependent on overall economic growth. But in the long-term, as we see a turnaround in the economy, I think these guys will be back on track and will continue to lead the way when it comes to digital ad spending.

SEANA SMITH: All right, Ali Mogharabi, always great to have you. Thanks so much for hopping on here for instant reaction. Again, Alphabet shares off just around 6%.