Why did Alphabet stock crash 9% on Wednesday?

Google's parent company delivered disappointing results that set off alarm bells about the state of the broader economy.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

What happened

Shares of Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) turned sharply lower on Wednesday, falling by  9.14%.

The catalyst that sent the tech giant lower was its third-quarter earnings report, which suggested the economy is worse than some feared.

So what

Alphabet generated revenue of $69 billion, up 6% year over year (up 11% in constant currency), as foreign currency headwinds ate into its results. Its operating margin continued the decline that began earlier this year, falling to 25% compared to 32% in the prior-year quarter. The bottom line showed the strain of the beleaguered economy as diluted earnings per share (EPS) of $1.06 slumped 24%.

To give some context to that performance, analysts' consensus estimates were calling for revenue of $71 billion and EPS of $1.26, so Alphabet missed expectations on both counts.

In the face of macroeconomic headwinds, Google Cloud held up relatively well, growing 38% year over year, bringing its run rate to nearly $27.5 billion. But the big story was a marked deceleration in Google's digital ad revenue, which grew just 2.5%.

Ad spending on YouTube exhibited the most noticeable change, as revenue declined to $7.07 billion, down 2% year over year and missing analysts' expectations of $7.42. This marks the first time YouTube's ad revenue declined year over year since Alphabet began breaking out the segment's results in 2019.

On the conference call to discuss the results, CFO Ruth Porat blamed the decelerating growth on "further pullbacks in advertiser spend," a phrase that sent a shiver through the digital advertising and ad-tech spaces.

Now what

Heading into the fourth quarter, Alphabet executives warned that the company was "lapping the outsized growth in 2021," resulting in tough comps, while simultaneously facing "larger" foreign exchange headwinds and a pullback in ad spending.

Over the long term, its industry-leading position in digital advertising makes Alphabet stock a buy -- particularly on any weakness -- but investors should buckle in for a bumpy ride over the next few quarters. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Danny Vena has positions in Alphabet (A shares). Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet (A shares) and Alphabet (C shares). The Motley Fool Australia has recommended Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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