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GOOGL And META Both Quietly Shrinking – A Bad Sign For Business?

Trade Alphabet Stock Your Capital Is At Risk
Updated 22 Sep 2022

Key points:

  • Google and Facebook are both cutting internal headcounts
  • In one key sense they’re both really advertising businesses
  • Advertising volumes and prices suffer badly in recessions

Both Alphabet (NASDAQ: GOOGL) and Meta Platforms (NASDAQ: META) are quietly shrinking their workforces. It’s possible to wonder what this means for the future of their businesses. The important thing to grasp is that when we model them as businesses we need – to a very large extent – to stop thinking about them as tech businesses. For the money flow through them is really all about advertising. So, what affects the money flow is what affects advertising. Something very different from whether the metaverse works, or whether the Chromebook market is expanding.

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It’s also true that both companies are now large enough that they are indeed going to swing like bellwethers with the wider economy – simply because the advertising market does exactly that. Again, we should be thinking – not exclusively, but significantly in part – about them both, GOOGL and META, simply as processors of advertising.

The particular issue that comes to mind is that both companies. Alphabet and Meta, are shrinking their workforces. They’re not doing so by announcing layoffs but they are making hiring much harder. They’re also cancelling internal projects then insisting that the workers on them apply for and gain other jobs within the companies at a rapid rate. So, there’s going to be some headcount reduction, even as there’s no large announcement of it happening.

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Also Read: How To Buy Google Shares

The issue here is that we can’t – or at least for part of our analysis, shouldn’t – be looking at the tech business to divine what might happen with Google and Meta. Both of them gain near all of their revenue from advertising. So, what happens to volumes and pricing of advertising in recessions? For we’re pretty sure we’re about to have one of those given the way the Federal Reserve keeps raising interest rates.

The answer is that advertising volumes drop off. It may well be true that to maintain sales a company should advertise more in a recession but that isn’t what does happen. Rather than fighting harder for each sale advertisers tend to cut advertising spend. It’s a cyclical business, matched to the business cycle that is.

And that’s what could well be weakening the share prices at GOOGL and META. That observation that – in financial terms – they are advertising businesses, not tech ones and advertising doesn’t do well in recessions. Something we also noted in lockdown in fact. There it was anyone trying to advertise anything that required personal presence or bricks and mortar who simply fell out of the marketplace altogether. The effect of that is dual though.

A fall in the volume of advertising, well? Except there’s a stock of advertising to sell. So, a reduction in the number of ads then gets compounded by a fall in the price of all ads. There’s less competition for each slot even as the number of slots stays static. It’s entirely possible that the biggest losers in terms of revenue from the coming recession will be the two advertising giants – Google and Facebook.