Sunday, 17 February, 2019

Alphabet beats earnings forecast, but costs weigh on shares

Bulls Look to Alphabet Results to Keep Tech Stock Rally Going Google's tumultuous year didn't stop it from making more money than ever
Laurie Berry | 05 February, 2019, 13:26

Alphabet Inc's fourth-quarter revenue and profit beat Wall Street's expectations on Monday but sharply higher spending, as it added data centers, cloud engineers and marketed its services heavily during the holidays, anxious investors.

Alphabet, the parent company of Google, has just released its quarterly and yearly financial results.

Alphabet's fourth quarter revenue rose 22 percent from a year ago to $39.28 billion, compared to the average expectation of $38.93 billion among analysts tracked by Refinitiv.

Traffic acquisition costs or TAC were $7.4B (consensus: $7.62B; up from $6.58B in Q3) or 23% of revenue, down a percentage point from last year's quarter.

The company which now has 98,771 employees globally reported a net income of $8.94 billion for the fourth quarter.

Google's paid-click growth slightly rose to more than 66% year-over-year, while the cost per click (CPC) declined 29%, slightly more than the third quarter of 2018.

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While Alphabet relies on Google's advertising business to generate profits, YouTube and cloud computing are costlier operations than its traditional desktop businesses.

Still, ads from Google and rival Facebook Inc. are more relevant and effective than most other options - precisely because the companies collect so much information on activity across the internet and beyond.

"The company's highest-growth areas (mobile search, programmatic, YouTube, hardware, and cloud) have lower margin profiles than the traditional desktop search business, so we see continued margin degradation for the company as a whole", wrote BMO Capital Markets analyst Daniel Salmon in a recent note.

Porat said increased operating costs stemmed from licensing content for YouTube, expanded data center operations and Google's hardware business. For the latter, much of the cost jump over the year was from fiber cable rollouts - Google has an very bad lot of private fiber - while the ad giant also invested in, among other things, data centers and the hiring of more sales and research workers. Losses in the category aren't uncommon since the other bets category is understood to be an umbrella for Alphabet's long-shot, experimental projects.

One stunning number is telling about Google's effectiveness as a business. Facebook results beat Wall Street estimates last week. Alphabet's profits were thinner because of its investment in cloud services. "Other Bets" revenues, primarily derived from Fiber and Verily life sciences, was $154 million for the quarter, up from $131 million a year ago, with a loss of $1.32 billion, up from a loss of $748 million a year earlier. The three largest advertisers, according to Ad Exchanger, were Geico, Samsung and Disney, which together accounted for 15% of all advertising a year ago.

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