The Google Ad Controversy: Should it Matter to Investors?
Alphabet Inc.’s GOOGL Google is currently in the news regarding the issue of ads emerging next to YouTube videos that display homophobic and anti-Semitic contents.
The UK Government called upon Google last Thursday after ads for taxpayer-funded bodies like The Royal Air Force, The Royal Navy and BBC appeared next to "extremist" YouTube videos.
The Government has suspended all its advertising from Google until further confirmation about those ads no longer appearing against questionable contents. The stock has lost 2.4% since, against the Zacks Internet-Services industry’s loss of 0.11%.
Google has been summoned for the second time this week to provide the government an update of the efforts it has been making to ensure that ads appear in undisputed environments.
Google’s Initial Response Seemed a Bit Weak
Google did give an explanation in a blog post the next day, stating that the company has policies to debar ads from appearing on pages or videos with offensive or derogatory contents. But implementation is not always easy, given the millions of sites in its network. Moreover, 400 hours of video get uploaded to Youtube every minute, which makes the implementation doubly difficult. The company, however, said that it had already initiated a review of the problem.
Nevertheless, the investor community did not seem satisfied with a “half-hearted” explanation. A rating downgrade came the very next working day, with Pivotal Research analyst Brian Wieser downgrading Google parent Alphabet from “Buy” to “Hold”.
Adding to Google’s troubles, the issue that primarily appeared to be centered on the U.K, went global in no time, with over 250 brands suspending their advertising on Youtube. The list includes big names from private as well as public sectors—Transport for London, The FCA, HSBC HSBC, Toyota TM, McDonald’s MCD, Heinz, The guardian, Channel 4, , L'Oreal, Marks & Spencer, Hargreaves Lansdown and Sainsbury’s.
A Clear Policy Revamp Announcement Followed
The severity of the issue forced Google to make some “serious” announcements the following day. The company posted some notable policy revamps that include a commitment to more fine-tuned advertiser controls, adding safer defaults, expanding video-level reporting for advertisers and increaseing investments to implement its ad policies faster.
Google also mentioned its plans to add a significant number of staff and deploy latest Artificial Intelligence (AI) powered tools to assess dubious content.
Should Investors be Wary?
Google is embroiled in a legal battle across practically all continents and issues like this are likely to add to its woes, at least in the short haul. Apart from being a huge drain on ad revenues, these give it a bad name.
Alphabet Inc. Revenue (TTM)
Alphabet Inc. Revenue (TTM) | Alphabet Inc. Quote
Nevertheless, the company has had extraordinary success in the courtroom and with government officials around the world. But developments like these are worth keeping an eye on and remain an overhang on the shares, at least for the time being.
In the long run, we don’t believe the issue will pose any severe threat to the company, given Google’s long history of execution, leading search market share and growing focus on innovation, strategic acquisitions and android OS. With huge cash balance and technological prowess, the company has the flexibility to pursue growth in any area that exhibits true potential.
Currently, Alphabet has a Zacks Rank #3 (Hold).A better-ranked stock is Autohome Inc. (ATHM), sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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