MoffettNathanson Senior Research Analyst Michael Nathanson joins Yahoo Finance Live to discuss quarterly earnings report data for Google parent company Alphabet and the outlook for ad revenue growth as advertisers look to YouTube rival TikTok.
BRIAN SOZZI: Welcome back. We're wasting no time getting back into Alphabet's big earnings whiff. The stock is under pressure in the pre-market, as Alphabet had a rare earnings shortfall and missed analyst sales forecasts on YouTube for the third straight quarter.
Also worth noting here, Alphabet is the top Trending Ticker right now on the Yahoo Finance platform. Joining us now to break down the numbers is Michael Nathanson, MoffettNathanson senior research analyst. Always great to get some time with you.
I liked your note this morning, Michael. There was a sense of calm amidst all of this concern on YouTube. But what's your take here? If you own Alphabet stock, what do you do?
MICHAEL NATHANSON: I am fine with Alphabet stock. The calmness was based on a laundry list of problems in the world. And they grew 26% organically. I'll take that, right?
The miss is not that we wanted a company. But I think you guys were referencing other big misses in other places in the market. And it's not surprising that a company that's built on advertising would have a slowdown due to all the macro headwinds in this world.
So your point about calm, that's exactly my message today. I'm not panicking. I'd buy more. I think the stock is really, really cheap.
JULIE HYMAN: Michael, it's Julie here. OK, so let's dig into YouTube a little bit specifically, because to me, YouTube, there are two questions. There is the ad question, which could be temporary and cyclical. But then there's sort of the existential question about competition, which is a question that also applies to Netflix and others. Is there a real threat, writ large, for YouTube from TikTok or others?
MICHAEL NATHANSON: Yeah, thanks, Julie. That was a question I asked on the call yesterday. As I phrased it, people are now more concerned about the TikTok threat to YouTube because of what Facebook has said. I think the threat is real.
The response by YouTube and Meta is trying to replicate what TikTok does in short-form video, which is hard to monetize. So I think the threat comes out in slowing revenue growth because they're adding inventory or adding impressions that are hard to monetize. So I think on mobile, TikTok is a real threat.
And we wrote, the opportunity here is really not connected TV, where YouTube is a top two destination for consumers. And we think they can grow that internationally as well. So we see a pivot for YouTube from mobile to connected TV. And that's an opportunity for them.
JULIE HYMAN: And conversely, should they just get rid of shorts? I mean, is it worth the effort? Or should they just try to consolidate, as you said, that leadership in connected TV and leave shorts to TikTok?
MICHAEL NATHANSON: I know. That's a good question. Same with Meta and Reels, right? You'll ask, tomorrow, that question.
I think you have to provide consumers with the type of content they're expecting to see now. And it's such a viral, engaging format that they have to do it, right? They'll be seen as old school if they don't innovate.
And I do think it's generational, right? I go to YouTube for certain types of content. I'm not there for short-form video, but I think my kids and their friends would be looking at something like a TikTok if they could replicate that on YouTube. So I think you have to try.
The bigger question in all this-- and I think you're getting to it is-- how does it monetize, right? It may not be as engaging for marketers. It may not be engaging for consumers. There may be a challenge in marketing these short-form video that are really addictive and hard to break out of versus traditional, more longer-form video.
BRIAN SOZZI: Michael, just staying on that, because it does look like market dynamics are changing. In large part, Snap, I would say, has quite the revival during the pandemic. TikTok is hot. Does it make sense for YouTube to still be inside of Alphabet? Should it be a separate company, where it could perhaps innovate a little quicker?
MICHAEL NATHANSON: No, I would say if anything-- we were talking about this last night with my team. If YouTube was a standalone company, it would have traded like Netflix and Roku. The missing revenue growth, the quarters in a row of missing analysts forecast, the de-sell, that would have been a terrible outcome for a YouTube stock.
YouTube benefits from being part of the broader Google ecosystem. When you log into YouTube, a lot of times you're logging in with your own Google ID. So you know who that it's you. They know your preferences. They know you've given yourself-- there's a lot of information you've given to Google. And you log in with that. You can log in, like I do, with my Google email address. That's a huge advantage in terms of monetization. You don't want to lose that. So I would think that would be a terrible outcome if they broke that out separately.
One of the questions you've got to ask is, why not go into more premium content, sports? You've seen other people do that. That's a question we'll ask in the future. But you wonder, can they do more on the professional content side to stand out from all this user-generated content that's filling up everyone else's carousels?
JULIE HYMAN: We've talked a lot about YouTube. We haven't talked as much about the cloud business, which the company is trying to build up, right? Do you think that is going to be a real growth driver and profit driver eventually going forward? And when do you think we're going to get there?
MICHAEL NATHANSON: Yeah, it's interesting. It's small dollar size to really drive the revenue beats or misses. It's nice it's growing really quickly.
We would say that, over the years, we would have thought it would have been more profitable sooner. We tracked the revenue growth versus AWS. And we would have thought at this point, it'd be more profitable.
Google does things their own way. We think it's a call option on profitability. But our view, Julie, is this. If you just looked at the stock's earnings from the advertising services, search, and YouTube, the earnings from that business are trading below a market multiple for businesses that are growing 20%-plus. So again, the cloud's a nice option for investors. It's not a big determinant of our revenue forecasts. But it's under-earning relative to where AWS was. So there's an opportunity to drive profits a little bit more faster.
But we track it. We all care about it, I would say. But search, as you've been asking, and YouTube, they're such large dollar items, that that really matters more to us.