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Alphabet slumps heading into second-quarter earnings as investors fret over ad sales and regulation

Key Points
  • Alphabet will report second-quarter earnings after Thursday's closing bell.
  • Investors are paying close attention to Google's advertising business, which showed a sharp decline in growth in the prior quarter.
  • Wall Street will be looking at how YouTube's updates weighed on the business.
Ruth Porat, Alphabet CFO
Adam Galica | CNBC

Entering its second-quarter earnings report on Thursday, Alphabet's in a bit of a slump.

The stock has dropped almost 10% in the past three months, leaving it up only about 9% for the year, dramatically underperforming its mega-cap tech peers and the benchmark S&P 500, which is up 20% in 2019.

Investor skepticism reflects broad concerns around Big Tech regulations and specific challenges in Google's core advertising business, which saw decelerating growth in the first quarter and trailed analysts' estimates. Ad sales rose 15%, down from 24% a year prior, and Alphabet's Chief Financial Office Ruth Porat said at the time that YouTube's algorithm changes caused lower engagement and ad revenue growth on the site.

When Alphabet reports earnings after the close of trading on Thursday, investors will be taking a close look at how changes across key platforms helped or hurt the business. Analysts expect the company to report total revenue growth of 17% to $38.2 billion, according to Refinitiv, decelerating from growth of 26% a year earlier. Earnings per share will likely come in at $11.30, analysts predict.

Since the first-quarter report, Google has made more changes to its video content business by adding restrictions and updating its hate speech policy.

In a note last month, analysts at Argus research said YouTube's new policy "limits algorithmic recommendations and may mean that borderline content will be denied the right to monetize through advertising." Still, the analysts recommend buying the stock and say the company could regain growth in the long term by attracting advertisers who have left due to the site's questionable content.

Analysts at Canaccord Genuity wrote this week that they will be looking to see whether the ad growth slowdown continues following the rollout of a new search ad type that allows brands to automate ad testing. Responsive Search Ads, as they're called, were piloted last year and Canaccord analysts said they're unclear about near-term results.

Regulatory hurdles

Google's internal challenges come at a time when regulators and lawmakers are closely examining the company on several fronts. Attorney General William Barr said Tuesday the Justice Department is opening a broad antitrust review of large tech companies. EMarketer projects Google will control 31.1% of the $332.5 billion global online ad market this year, making it by far the largest company in the space.

The Trump administration has additional interests in Google. Earlier this month, the president said he will "take a look" into Google following statements made by billionaire investor and Facebook board member Peter Thiel, who said the FBI and the CIA should investigate the company to see if it has been infiltrated by Chinese intelligence. 

A Google spokesperson responded by saying: "As we have said before, we do not work with the Chinese military."

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