Why Google's YouTube Ad Controversy Is More Serious Than Facebook's Mis-Measured Metrics

If Facebook Inc (NASDAQ: FB) managed to escape its ad controversy in which it inflated metrics relatively unscathed, can investors expect Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL) to see a similar fate for its ad scandal as ads from notable brands are being shown alongside hate and even terrorist content on YouTube?

BMO Capital Markets' Daniel Salmon commented in a research report that several industry experts he spoke with share two common themes:

1. YouTube's issues pose risks for brands and advertisers on its platform.
2. The issue also poses risks to YouTube's own brand.

No Change To Long-Term Story

Salmon further argued that investors should be concerned since YouTube represents one of Alphabet's only five revenue catalysts — the others being Pixel phones, Cloud, mobile search ads and Promoted Pins on Maps. Nevertheless, the analyst believes this doesn't change the long-term story, as YouTube ad revenue is low margin given the revenue sharing agreement with brands.

Salmon did, however, note that the ad scandal comes at an inconvenient time. Specifically, YouTube will host its Brandcast event on May 4, which kicks off negotiations for upfront, reserved YouTube buys and advertisers can use YouTube's scandal as leverage in negotiations.

Bottom line, the analyst reiterated Alphabet's stock as a long-term core holding with an Outperform rating and $1,005 price target.

Related Links:

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

Advertising Community Says Google's YouTube Ad Scandal 'A Real Issue'