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Alphabet's higher spending worries investors, shares dip

File photo. Photograph:( Reuters )

Reuters New Delhi, Delhi, India Feb 05, 2019, 09.11 AM (IST)

Alphabet Inc reported sharply higher fourth-quarter spending on video content, employees and facilities, worrying investors who sent the tech company's shares down about 3 per cent after hours on Monday.

Google's parent company beat Wall Street's estimates for revenue and profit, but the bigger-than-expected spending prompted investors to question whether cash funnelled into Alphabet's newer businesses will generate the returns that its search engine unit historically has.

"While the core business is still growing impressively, the significant spending shows growth isn’t quite as capital-light as had been hoped," said George Salmon, a stock analyst at financial firm Hargreaves Lansdown.

The company reported $31.07 billion in total fourth-quarter costs and expenses, up 26 per cent from last year. Capital expenditures rose 64 per cent compared to last year, up to $7.08 billion.

Spending was pushed higher by Google boosting staffing on its cloud computing division, promoting its consumer devices and YouTube subscription packages and acquiring office buildings in Silicon Valley and New York City.

Alphabet Chief Financial Officer Ruth Porat told analysts that capital expenditures would moderate significantly this year, but the company would continue to invest in long-term bets on artificial intelligence services, consumer hardware and emerging markets.

Revenue, profit beats

Alphabet's fourth-quarter revenue rose 22 per cent from a year ago to $39.28 billion, compared with Wall Street's average estimate of $38.93 billion, according to IBES data from Refinitiv. About 83 per cent of the revenue came from Google's ad system.

Heavy advertising in the run-up to the holiday shopping season boosted sales. Google Chief Executive Sundar Pichai told analysts the number of people shopping on Google.com each day during the holidays doubled over last year.

Profit for the quarter was $8.95 billion, or $12.77 per share, compared with a $3 billion loss a year ago. That beat analysts' average estimates of $7.69 billion, or $10.87 per share.

Partly because of the higher spending, the Alphabet's operating margin was 21 per cent, down from 24 per cent in the year-ago period.

"For a growth company, investment should be applauded," said Atlantic Equities analyst James Cordwell. "But a lot of the additional expenditure is going into the cloud where it is unclear whether there will ever be a return on that investment." Google remains behind rival Amazon.com Inc in the cloud, said Cordwell.

The company has authorized a plan to buy back an additional $12.5 billion worth of its shares, Porat said.

No news on waymo

Google's mostly free search, video and productivity tools are used by billions of people across the world, despite a backlash in some countries over how the company uses and protects customer information.

Investors concerned that Alphabet's future growth, especially in emerging markets, will not match its previous rates, are looking to the company's other businesses to provide new streams of revenue. But Alphabet gave away little new information on its other ventures on Monday.

It gave no indication when its self-driving car company Waymo will generate noticeable revenue. In October, Alphabet said Waymo had begun revenue-generating rides within a small section of Arizona but did not break out the company's financials.

Pichai said Google's cloud computing unit last year doubled the number of deals it struck worth more than $1 million. The cloud unit's G Suite productivity product now has 5 million customers, he said, up from 4 million in last year's first quarter.

Story highlights

The company reported $31.07 billion in total fourth-quarter costs and expenses, up 26 per cent from last year. Capital expenditures rose 64 per cent compared to last year, up to $7.08 billion.