Alphabet Shares Fall After Earnings on Concerns of New Spending

April 24, 2018

Alphabet Inc. shares fell after first-quarter results sparked concern the company is embarking on a new spending binge to chase its biggest rivals.

Google’s parent posted the strongest sales growth in almost four years on Monday, indicating marketers kept flocking to its services despite rising scrutiny of digital ads. But the company also spent at historic levels, nearly tripling capital expenditure for the quarter to $7.7 billion.

Almost all of that spending went to buttress newer cloud and consumer-device businesses that lag behind leaders Amazon.com Inc. and Apple Inc. After neglecting these markets for years in favor of its main ad businesses and riskier moonshot bets, Alphabet is now splurging to catch up.

"The big story from the results was the significant rise in expenses," Brian Wieser, an analyst at Pivotal Research Group, wrote in a note to investors.

Alphabet’s rising first-quarter investments partly reflected a $2.4 billion real-estate deal. But even without that, capex more than doubled from a year earlier. Chief Financial Officer Ruth Porat cautioned investors to expect more of the same. "I wouldn’t suggest a one-off in terms of the investment we’re making," she said. "We’re really building out to support the growth that we’re seeing."

Porat ticked off the items that are opening her wallet: data centers; three new undersea cables; processors, networking equipment and other machinery to power Google’s sprawling artificial intelligence efforts.

Chief Executive Officer Sundar Pichai told investors that Google’s nascent hardware unit, which builds smartphones and speakers rivaling Amazon and Apple, is two to three years from "the scale that we want to see." The investment required for this includes custom chips designed in-house, an expensive skill that Apple has been developing for years.

Previous heavy investment periods mostly supported Google businesses like Search and YouTube that had leading market positions. This time, it’s unclear if the company can close the gap with Amazon and Apple. Google’s cloud-computing service will likely generate as much as $2.5 billion in sales this year, according to Forrester Research estimates. That’s a fraction of the revenue Amazon Web Services pulls in each quarter. Google sold about 2 million Pixel phones in the fourth quarter, UBS estimated. Apple sold 77 million iPhones in that period.

Google’s higher spending in the first quarter shaved operating profit margins to 22 percent from 27 percent a year earlier. UBS analyst Eric Sheridan said that this volatility is the "new normal" for the company as it expands its cloud business, spends more on marketing consumer devices and YouTube invests in more original content.

Google Earnings Raise Questions On Amazon.com Rivalry, Spending

April 24, 2018

Google-parent Alphabet's move to boost capital spending during the first quarter as it tries to take on rival Amazon.com was a key factor in its stock falling during early trades Tuesday.

The internet search giant late Monday said it spent heavily on YouTube and video content, cloud computing, smart home consumer appliances and artificial intelligence projects.

Google earnings and revenue topped views, but its attempts to keep up with Amazon amid their growing rivalry impacted financials. Adjusted operating margins were 40.6%, below analyst projections for 41.9%. Capital expenditures jumped to $7.3 billion from $2.5 billion in the year-ago period, including $2.4 billion for a real estate purchase in Manhattan.

Google-Amazon Rivalry Grows

The Amazon rivalry looms as a long-term threat to Google's core advertising business, analysts say. Amazon's voice-activated smart home devices account for more consumer internet searches.

"Google's (first-quarter report) was highlighted by the best revenue growth we've seen since 2014, offset by margin compression and elevated (capital expenditure spending)," Brent Thill, Jefferies analyst, said in his report to clients.

Thill added that 2018 "sounds like an investment year, given the company is taking on multiple challenges — catching up to Amazon in home/cloud, while also driving multiple large businesses forward (YouTube, consumer hardware, self-driving cars/Waymo)."

Google Margins A Worry

"A second consecutive quarter of operating expenses outpacing street models is likely to raise questions from investors on whether or not Alphabet will show as much margin expansion, if any, as previously expected in 2018 and beyond," Ralph Schackart, William Blair analyst, said in his note.

The company said first-quarter earnings were $13.33 a share, including investment gains on equity securities, up 72% from a year ago. The investment gain amounted to $3.40 per share. Excluding the gain, profits amounted to $9.93 per share, still topping consensus estimates.

Revenue jumped 26% to $31.15 billion. Google said traffic costs — or what it pays partner websites to generate advertising revenue — jumped 36% to $6.288 billion. Analysts had estimated traffic costs of $6.03 billion.

Stocks cling to modest gain as 10-year yield at 3% seen as a headwind

April 24, 2018

What are strategists saying?

“Crossing 3% on the 10-year is something that will certainly raise concerns, but at this stage of the cycle, higher yields aren’t antithetical to rising stock prices. For the time being I think we’re fine, but we’re certainly keeping an eye on the yield curve, especially if the Fed becomes more aggressive,” said Bruce McCain, chief investment strategist at Key Private Bank. “Ultimately earnings remain the primary driver, along with the fact that the economy is still in pretty good shape.

Hussein Sayed, chief market strategist at FXTM, said that “the 3% by itself is just a psychological level and not a significant threat, but if a break above leads to further selling in Treasury bonds, that’s going to be a serious warning signal for equity bulls. With a current world running on A.I and algorithms, a selloff may look ugly.”

Alphabet reluctantly tells investors how much money it’s losing on Nest

Apr 24, 2018

Smart home gadget maker Nest sold $726 million worth of thermostats, security cameras and smoke alarms last year, but failed to turn a profit — losing $621 million, according to parent company Alphabet's latest quarterly report, published Monday.

It’s the first time Mountain View-based Alphabet has detailed Nest’s performance since acquiring the Palo Alto-based hardware startup in 2014 for $3.2 billion. For the past four years, Wall Street analysts have speculated that Nest hemorrhages money, with thin margins and unsustainably high operating costs.

Earlier this year, Alphabet moved Nest from its experimental products division — which the company calls “Other Bets” — into Google’s hardware division. That accounting change prompted the company to restate its financial performance for the past four quarters as if Nest was part of Google’s hardware division all along.

Comparing the originally published quarterly results with the restated results, it appears Nest pulled in $112 million in the first quarter, $151 million in the second quarter, $185 million in the third quarter and $278 million in the fourth quarter. But despite those gains, the division ended the year losing money — and has yet to break $1 billion in annual revenue.

Google parent Alphabet Inc. is scheduled to announce second-quarter earnings after the market closes on Monday. Here’s what you need to know:

EARNINGS: Alphabet is expected to report per-share earnings of $9.66, excluding the impact of a $5.07 billion charge accrued in connection with a European Commission fine, according to analysts polled by FactSet. That compares to per-share earnings a year earlier of $8.90, which excluded a $2.7 billion charge for an earlier European fine.

REVENUE: Analysts expect revenue of $25.6 billion excluding payments to advertising partners, compared with $20.9 billion on the same basis in the year-earlier period.

ANDROID BUSINESS: Alphabet reports earnings days after the European Commission slapped Google with a $5 billion fine for abusing the dominance of its Android mobile operating system. The EU ordered Google to stop forcing Android handset makers to bundle Google’s Search and Chrome apps on devices that also include the Google Play store for third-party apps. That could give handset makers leverage to extract payments from Google to pre-install those apps, crimping the company’s mobile profits.

The company said it will accrue the fine as a charge in the second quarter while it appeals the ruling. What’s still a mystery is whether Google will have to change the business model underlying its mobile software to comply with the EU, and potentially assume new costs to distribute its mobile software. Investors will be looking for any discussion of Android and its mobile partners when management discusses results.

PRIVACY: Europe’s new data rules went into effect in May, forcing changes to the way tech companies and online publishers get consent from web users to collect their data and target ads to them. Rather than undercutting Alphabet’s business, the rules appear to be helping the company boost its share of online advertising, as smaller firms have a harder time showing they are compliant with the regulation.

CAPITAL EXPENDITURES: Google surprised investors earlier this year when it reported capital expenditures nearly tripled from a year earlier, which included its $2.4 billion purchase of a building in New York’s Chelsea Market as well as investments in data centers and undersea cables. Alphabet Chief Financial Officer Ruth Porat suggested the spending could continue, as Google invests in infrastructure the company says is critical to maintaining its lead in future technologies such as machine learning.

Alphabet stock sinks on revenue miss

Google-parent company Alphabet just reported its third quarter earnings. The company beat earnings expectations but missed revenue expectations. The stock sunk as much as 5 percent, though it regained to hover around 3 percent down.

Here are the most important numbers:
.

• Earnings per share: $13.06 versus $10.42 expected by a Refinitiv consensus estimate
• Revenue: $33.7 billion versus $34.04 billion expected by a Refinitiv consensus estimate

Alphabet's overall revenues were up 21 percent year-over-year. As usual, Google's advertising business accounted for most of its revenue, hitting $28.95 billion in the third quarter, up 18.44 percent year-over-year.

Meanwhile, its "other revenues" category, which includes its cloud business and hardware sales and is especially important to investors looking for Google's future beyond ads, hit $4.64 billion, or a 25.5 percent increase year-over-year. That's a less dramatic acceleration than last quarter's, where the category increased its revenues 36.5 percent year-over-year.

Alphabet also breaks out the revenues and losses for its longer-term "Other Bets," like healthcare company Verily, internet service provider Fiber, and self-driving car company Waymo. Other Bets posted Q2 revenue of $146 million, up from $117 million the same quarter last year. Operating losses also grew, with the company posting losses of $727 million up from losses of $650 million the year before.

Google's traffic acquisition costs (TAC), which includes the money it pays to phone manufactures, like Apple, to use its services, like search, was $6.58 billion, or 23 percent of its advertising revenues. Wall Street has been watching Google's rising TAC closely, as it's been squeezing the company's advertising margins. That's the same percentage as Google reported last quarter.

This story is developing.

In Alphabet Earnings, Focus on Google’s Ad Business

Feb. 1, 2019

Alphabet (ticker GOOGL), the parent company of search engine behemoth Google, is expected to report strong fiscal fourth-quarter results after the market closes Monday.

It is a case of more of the same, as Google continues to haul in digital advertising and makes inroads in cloud computing.

“We remain constructive on Alphabet into earnings, as checks with advertisers and 3P [third-party] marketing partners were consistently healthy through the holiday period,” Baird analyst Colin Sebastian wrote in a note Monday. He reiterated an Outperform rating and price target of $1,380 on Alphabet shares. “Overall, Alphabet remains a top 2019 pick.”

Analysts polled by FactSet expect good things: Wall Street analysts are looking for quarterly earnings of $10.86 per share using standard accounting methods, or $11.02 without them, according to FactSet, on sales of $38.9 billion. (In the same quarter a year ago, Alphabet posted earnings of $9.70 a share on revenue of $32.32 billion.)

Alphabet is benefiting of late from a winning quarterly report from Facebook (FB) on Wednesday. Facebook crushed Wall Street forecasts with earnings of $2.38 a share on sales of $16.91 billion, temporarily easing concerns about federal regulation of the two companies after a string of user data snafus.

For now, the emphasis will be on Alphabet’s advertising business, which accounted for 86% of its revenue in the previously reported quarter. Growth in Google Cloud, hardware, and Google Play could slightly change the dynamic.

KeyBanc analyst Andy Hargreaves, who expects gross and net ad revenue to grow by double digits, on Tuesday reiterated an Overweight rating and $1,430 price target on Alphabet—roughly a 30% upside from Alphabet’s current price.

Earnings: Analysts on average expect Alphabet to report earnings of $10.53 a share, according to FactSet, though it appears they are probably not taking the latest fine into account in those estimates as they have not come down appreciably since the fine was announced. Alphabet reported earnings of $13.33 a share in the same quarter a year ago, thanks to a huge boost in investment income largely from its stake in Uber Technologies Inc.

Revenue: Alphabet is expected to post first-quarter revenue of $30.04 billion after accounting for traffic-acquisition costs, according to analyst estimates. Estimize contributors on average project $30.18 billion. The company reported ex-TAC revenue of $24.86 billion a year ago.

Alphabet is scheduled to report financial results for its fiscal first-quarter on Monday after the market’s close.

Here’s a snapshot of Wall Street’s expectations and some recent history.

• Wall Street analysts are looking for earnings of $10.41 per share, according to FactSet, on revenue of $37.3 billion.

Alphabet Inc.’s quarterly earnings were dented by heavy investment in Google’s cloud-computing business, which is key to future growth but still runs a distant third in the market behind Amazon.com Inc. and Microsoft Corp.

• Before the Alphabet rebrand in 2015, Google effectively split its stock with the introduction of a third class of shares.
• Alphabet stock has doubled in less than two years, and the new split would make it more affordable for more people.

• Alphabet beat on the top and bottom lines for the fourth quarter.
• The stock jumped in extended trading after the report.
• The company also announced a 20-for-1 stock split.

Here are the key numbers:

• Earnings per share (EPS): $30.69 vs $27.34 expected, according to Refinitiv
• Revenue: $75.33 billion vs $72.17 billion expected, according to Refinitiv
• YouTube advertising revenue: $8.63 billion vs. $8.87 billion expected, according to StreetAccount
• Google Cloud revenue: $5.54 billion vs $5.47 billion expected, according to StreetAccount
• Traffic acquisition costs (TAC): $13.43 billion vs. $12.84 billion expected, according to StreetAccount

...IBM’s closing price on Tuesday was $135.53. With IBM’s recent spin-off of its managed infrastructure business, Kyndryl, and its data and analytics business for health care companies, Watson Health, Big Blue is shrinking. And even before the spinoffs, IBM was plagued by growth issues for years.

Could IBM be a candidate to be removed from the Dow? Maybe. If so, would the index committee look at a stock with higher growth potential like Alphabet.

...