Can Google's ad income weather a downturn?

Scanning through the charts can sometimes feel like a chore. But it can also open doors, spark ideas, and send us down rabbit holes. So it is with this chart of Google’s share performance:

Now, this is a weekly view, so we’ve filtered out some of the noise, and it’s also for the period since the stock split. Like many stocks, it’s currently trading a way below all-time-highs. That’s not necessarily anything remarkable.

However, the price action is intriguing. Dipping below the 123 handle and into a new range, the structure is very reminiscent of a bear flag. A break below the lower trendline and 107 zone could open up a move to support levels around 96 & 85.

Digging beyond the technicals, the macro and fundamental picture is worth considering too. A lot of the time, Google is a successful company. Due to its current size, the behemoth's not growing at the same rate as it used to, but it's still chugging along, increasing earnings and generally rewarding shareholders.

Can that continue?

Advertising is the lion’s share of Google’s revenues, so if there’s a downturn in advertising, it stands to reason that Google could take a hit. Early signs of advertising slowdown are already here.

This MediaPost report highlights the worst ad decline in two years, as the U.S. advertising marketplace contracted 12.7% in July versus the same month a year ago, marking its first double-digit rate of decline since July 2020.

Now, some of this can be attributed to base effects. Those 2021 outliers were huge, so comparing a more ‘normal’ year, it’s bound to rate poorly.

And Google’s media revenues in July also fell, although not so much as some of their competitors.

Advertising is a hyper-competitive market. Snap is struggling to compete and their plans to scale up aggressively during the pandemic have had limited success. The firm has added more users, but struggles to turn a profit via ad revenues.

They’re in the process of cutting 20% of the workforce, and their chief business officer is leaving. Not only that, Jeremi Gorman’s leaving Snap to run the ads for Netflix, as the streaming service looks to launch their own ad-supported tier amid a push to restructure the business and increase profitability.

Meta CEO Mark Zuckerberg warned on the last earnings call that

“we seem to have entered an economic downturn that will have a broad impact on the digital advertising business”.

Roku Chief Executive Anthony Wood told analysts in July

“we’re in an economic cycle where advertising is trending down… It’ll turn around.”

But will it? It’s hard to move for recession forecasts, while some analysts are calmer and see a longer period of slower growth for the global economy, more of a stagnation than an outright contraction.

Even so, if the economy slows, companies still need to advertise, and looking at current trends they’ll probably be spoilt for choice. Could this trigger a race to the bottom?

And if so, would this be all bad for Google, or will their dominant position allow them to patiently snap up competitors on the cheap (“nobody wins in a race to the bottom”) and further strengthen their grip on digital advertising?