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Tech hiring freezes show companies ‘expecting continuing slowdown,’ analyst says

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Morningstar Senior Equity Analyst Ali Mogharabi sits down with Yahoo Finance Live to break down Google's earnings report, its advertising revenue, cloud services, and the hiring slowdowns the tech industry is experiencing.

Video Transcript

[ELECTRONIC BEEPING]

RACHELLE AKUFFO: Welcome back, everyone. Staying in earnings season, we just heard from Alphabet. Shares to the positive there, up about 2 and 1/3 of a percent there. Let's bring in Ali Mogharabi, Morningstar Senior Equity Analyst, to break some of this down. So what are your biggest takeaways from this earnings report?

ALI MOGHARABI: Sure, well, there are a couple of things. First, it seems that the advertising revenue is not in as bad shape as expected. I mean, you look at that separately, you're basically looking at overall advertising growth at around, I think, 11.6%, close to 12%. The slowdown in YouTube is not necessarily that much worse than it was last quarter. And also search is still growing pretty healthily. I mean, I think it was 13 and 1/2 percent growth year over year.

So on the search side, it tells us that while advertisers are being either hesitant or pulling back spending on some other platforms, they're most likely taking some of that and bringing it onto search, as it's more of a sure thing. It's not as dependent on the idea phase of Apple and so forth. So that's number one on the ad set.

And then number two, we thought-- I think actually, the cloud growth is pretty impressive. I think it's 35.6% year over year growth. So that slowdown, or I should say the macro environment is not, at least for Google's case or Alphabet's case, is not necessarily impacting the slowdown in the overall digital transformation, which has been one of the drivers of their cloud business.

DAVE BRIGGS: And what does it say about the overall cloud environment, Ali?

ALI MOGHARABI: Well, for the overall cloud environment, I think it's still pretty healthy, again, going just based on Google's numbers right now. I think basically what it says is that digital transformation is still highly prioritized, whether it's for large enterprises and/or even medium-sized businesses. They saw the benefits of those during pandemic, unforeseen of course, pandemic in 2020.

So that's basically an investment that's necessary for the future in order for all of the businesses to streamline their workflow, to operate more efficiently overall.

SEANA SMITH: What about the announcements that we've gotten not only from Google? We heard from Sundar Pichai ahead of this report. But the slowdown that we're seeing in hiring, in some cases, we're seeing some of the tech companies layoff a number of workers. As you're looking at this from an analyst's perspective, what do you see? I guess, what does that signal to you over the next couple of quarters?

ALI MOGHARABI: Well, it certainly signals, in my opinion, basically a slowdown that management and/or the company is expecting in top line growth. And that's partially due to the macroeconomic environment, due to, of course, inflation, due to also various other uncertainties. In Google's case or Alphabet's case, likely also due to regulatory uncertainties and all the antitrust risks that these guys also face.

So you put all of that together. And yeah, it seems that these guys are actually expecting continuing slowdown, at least through probably the third quarter of this year in terms of the top line growth.

RACHELLE AKUFFO: And in terms of your expectations, not just for the earnings call, but also when we can expect to see some of the issues-- obviously, this is backward-looking-- start to appear in the third quarter results?

ALI MOGHARABI: Well, that's an interesting question because we actually think that in the second half, it's going to be a little bit better. We think one of the things that has slowed down overall ad spending in the social network, which of course YouTube is part of it, the social network platform is the uncertainty that Apple's new policies have brought about and also, of course, the uncertainty that will come along with as soon as Google eliminates cookies.

But we think that over time, since the beginning of this year actually, let's just say since the second half of last year, we think the ad techs, the advertisers, the publishers, they all have been working together to come up with various types of solutions for this. And I think you will see some progress made. So therefore, probably in Q3, you will see a lot of options to measure the ad effectiveness a little bit more in time, in real time, I should say, dynamically, which of course, will help them to optimize the ad placements, which of course will hopefully help them to increase the ROIs on the ads, which then will drive some additional demand on the ad growth.

Of course, part of that will be offset by, again, the macroeconomic uncertainty. But from the standpoint of, are the advertisers again gaining confidence in purchasing ad inventory on social network platforms? We think that's going to improve in the second half of this year.

SEANA SMITH: Ali, search and cloud really two standouts here when we're looking at Alphabet's results. The outperformance that we've seen in search, you were talking about the fact that maybe some of that ad spend is being directed towards search because it's a little bit more reliable, at least in this environment. Is this a trend that you see continuing for the coming quarters?

ALI MOGHARABI: Probably. We think it's probably going to continue at least through the third quarter. And then as I mentioned before, as the advertisers gain confidence in the various social network platforms again, then you could probably see some of that search ad spending be taken again and allocated towards those social networks.

Of course, for Google, that company is in a very good position because it has the search side. And of course, it also has a social network. So probably, beginning in third quarter through fourth quarter, you could see some acceleration in YouTube ad revenue growth more than offsetting some of the deceleration that we may see in the search ad spending growth.

SEANA SMITH: Ali Mogharabi, always great to get your perspective. Thanks so much for joining us again. Shares of Alphabet moving higher here after hours.