The flap over ads showing up next to terrorist content could hurt Google's revenue, say analysts

Larry Page
Getty Images

Google's ad troubles are becoming a bigger concern to Wall Street, but analysts have yet to go completely negative on the company because of it.

Both Mizuho and Bank of America Merrill Lynch warned on Thursday a potential hit to Alphabet's revenue from companies pulling out ads due to fears of them appearing next to objectionable content, primarily on YouTube. But while it may affect Google's earnings in the near future, they still believe Alphabet stock is still worth purchasing.

"However, if Google does not nip this issue in the bud, we think there could be broader repercussions around YouTube's brand, if consumers, creators and advertisers stop coming to the site," Mizuho managing director Neil Doshi wrote in a note.

Google came under fire late last week when a report in The Times of London revealed ads from companies and charities including Mercedes-Benz, Waitrose and Marie Curie were running alongside neo-Nazi and jihadist videos on YouTube and websites served by the Google Display Network in the U.K. However, some agencies have suggested the ad adjacency issue is a digital advertising issue in general, especially in online video.

Media buying agency Havas pulled spending from YouTube and Google Display Network in the U.K., while Johnson & Johnson said it would pause all global advertising on YouTube on Thursday, accoridng to Reuters. Other companies including Sainsbury's, Sky and Marks & Spencer have also expressed intent to do so, according to Pivotal. The analyst group changed its Alphabet stock rating from buy to hold on Monday.

Bank of America Merrill Lynch wrote that it is difficult to predict how much the issue would affect Google in the long run. It acknowledged that some American brands have pulled money, and each 1 percent loss in global revenue equals about $200 million annually or $16 million a month. It also noted it didn't think companies were pulling their advertising permanently.

"We would expect many advertisers to return to Google over the next few months as ad controls are improved, but it could take several quarters for spend levels to return to normal," the company wrote in the note.

Similarly, Mizuho said if the issue affected 10 percent of Google's revenue, it would only decrease the company's earns per share by $0.15 cents this year or a little under 1 percent of the value.

"We like the fact that Alphabet continues to innovate around ads, and we see device bidding, expanded text ads, and Google cloud as meaningful drivers of growth in 2017," Doshi wrote. "While we view this (YouTube) ad issue as a near-term concern, we believe Google is working hard to address the issues and win back the trust of its brand advertisers."