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YouTube's Ad Controversy Not Going Away Yet; Will It Prove To Be Temporary?

VZ, T, JNJ, GOOG | March 24, 2017

Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL) has been drawing flak from its advertisers for allowing hate messages/offensive content to be displayed alongside ads from these companies.

Speedy Resolution Likely

Commenting on the development, Pacific Crest Securities, a unit of KeyBanc Capital Markets, said in a note released on Thursday said the issue is temporary in nature and could be resolved soon.

Analysts Andy Hargreaves and Evan Wingren noted that several European advertisers have reportedly pulled their YouTube advertising in the last week and the week before. Some U.S. advertisers, including AT&T Inc. (NYSE: T), Verizon Communications Inc. (NYSE: VZ) and Johnson & Johnson (NYSE: JNJ), have also followed suit.

Pacific Crest Securities pointed out the contention of the advertisers is that hateful or offensive content is being associated with their brands. The firm believes it is an industry-wide problem that comes with the scale and complexity of digital advertising.

The firm said, notwithstanding the current development, there is no denying that deteriorating linear TV viewership is forcing a shift of ad dollars and that YouTube has the most quality video inventory of anyone.

Existing Solutions Can Only Get Better

"We think with Google's acknowledgement of the issue, and the vast resources it has to fix it, that there will be an effective solution in place in short order," the firm said. The firm clarified that Google already has ad products like Google Preferred that allow advertisers choose a subset of content partners to associate with and various other tools.

Given that there are already solutions in place, the firm thinks these will only get better. The firm thinks it is in the best interest of Google that it puts in place more tools and techniques to give advertisers more control.

No Material Impact Expected

The firm does not expect this to meaningfully impact Google's advertising revenues. The firm also noted that most ad revenues are bought on well-defined metrics and ROI profiles and that the ROI will remain solid as long as customers are on the platform. "So, unless the bad press causes people to stop using Google services (unlikely), then our estimates should not be meaningfully impacted," the firm stated.

Concluding, Pacific Crest Securities said it would be buyers of the shares of the company on the weakness triggered by the development.

The firm has an Overweight rating on the shares of Google and a $1,040 price target, suggesting roughly 24 percent upside from current levels.

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