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Google Selloff Reveals Wall Street Worries About The Online Advertising Model



Google continued to retaliate on Tuesday with a first quarter financial report that had some unpleasant surprises.

Google Inc.'s parent company Alphabet Inc ended the regular trading session at 4.5%.

Even analysts who reduced their price targets struggled to explain the mindset behind investor reactions.

"Unfortunately, I think many people are up to date," said Scott Kessler, Director of Equity Research at CFRA Research, who has scaled his 12-month target by $ 50 to $ 1,235 a share on Google's earnings Reduced still has a strong buy recommendation for the stock. "I definitely think it's overreaction, it feels like a snowball effect."

Tuesday's results came in the midst of a general market sell-off that also affected some of Google's biggest competitors. Facebook and Amazon fell more than three percent each, while Apple shares slumped more than two percent. Nevertheless, some of them have suffered a decline like Google. Perhaps most important to the digital ad business is that Google was the first of the top companies in the sector to release the results for the first quarter, and this is not an encouraging start.

Google reported first-quarter revenue up 23% from the first quarter of last year, exceeding analyst expectations. In the same period, however, the investments of the search giants almost tripled. In addition, the cost of acquiring transportation companies increased by 37%, accounting for a higher percentage of revenue than in the same quarter last year.

Google has the potential to find that new rules in Europe on user privacy may affect the ability of the company to collect the kind of information that advertisers want. Then, closer to home, there are the effects of recent Facebook issues with Cambridge Analytica, which is accused of misappropriating user data.

The Wall Street Journal recently wrote that although Facebook is controlled by Congressmen, Facebook is the advertising agency that has the most information about the public. Why are not they asked to testify before the legislators?

Investing for Growth or Excessive Spending?

Facebook CEO Mark Zuckerberg

Justin Sullivan / Getty Images

Shebly Seyrafi, director of Internet research at FBN Securities, sees encouraging signs from Google and outperforms its shares. In his note on Tuesday, he pointed to the company's growth in mobile search and on YouTube. He noted that paid clicks on Google sites increased 59 percent compared to the first quarter of 2017. Sales in the category also rose 26 percent, up from 22 percent in the same period last year.

Regarding Google's increased costs, Seyrafi sees discrepancies with Wall Street's response to the way various technology companies invest. Google said that rising capital spending was partly due to building a global Internet network, a multi-billion dollar project involving the deployment of its own submarine cables, data center construction and the purchase of vast amounts of computers.

"I think what happened is that Alphabet is investing for growth," Seyrafi Business Insider said Tuesday. "Unlike Amazon, which also invests, the street is not ready to accept Google's strategy like Amazon … but what Google does is prudent."

Seyrafi also suspects that Google investors expect bad news from Facebook when the social network announces first-quarter results on Wednesday after the bell day. Any pliability in the business prospects of Facebook would be rather bad news for Google, since the prospects of both companies with the state of the online advertising market are linked.

"I think some investors step back a bit," Seyrafi said. "Some are worried about the digital advertising model, especially to Cambridge, and some are worried about Facebook's future prospects and that it may not be positive, and they want to leave Google before that."

Business Insider will report live on Facebook after the bell on Wednesday.


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