Alphabet misses estimates amid diversification effort

Google parent Alphabet Inc. posted fourth-quarter profit below analysts’ estimates on Thursday, increasing pressure on the company to deliver on new bets in hardware and cloud computing as its advertising business matures.

While advertising still accounts for the lion’s share of Google’s revenue, rising 17.4 per cent to $22.4 billion in the fourth quarter, Alphabet Chief Financial Officer Ruth Porat underscored that the company is diversifying its business, pointing to growth in hardware, app sales and the cloud business. The company’s other revenue, which captures such businesses, climbed 62 per cent. “We see tremendous potential ahead for these businesses, as well as in the continued development of non-advertising revenue streams for YouTube,” Porat said on a call with investors.

She spotlighted the company’s line of Nest smart home products, saying sales doubled during the key holiday period including Black Friday and Cyber Monday.

Google-branded hardware also showed promise as Google Home, a smart speaker, and the Pixel smartphone gained traction over the holidays, Google chief executive Sundar Pichai said during the call.

“We’re committed to this for the long term as a great way to bring a beautiful, seamless Google experience to people,” he said.

The company posted a stronger-than-expected 22.2-per-cent increase in quarterly revenue as advertisers spent more to reach an expanding user base that spends more time on smartphones and YouTube.

Despite the slight miss on earnings per share, analyst Kerry Rice of Needham and Co. said the strong revenue growth suggests that Google’s core business remains healthy. “The top line indicated that the growth fundamentals are still well intact for the business,” he said.

Research firm eMarketer has estimated that Google will capture US$60.92 billion in search ad revenue this year, or 58.8 per cent of the search ad market worldwide.

Paid clicks, or clicks on Google ads, rose 36 per cent, compared with a 33-per-cent increase in the third quarter. Paid clicks are those ads on which an advertiser pays only if a user clicks on them.

Analysts on average had expected a rise of 26.9 per cent, according to FactSet StreetAccount.

Cost-per-click dropped nine per cent, a slide that has continued as Google sells more mobile ads, which command lower prices. However, the shift is not necessarily alarming as it suggests Google is selling more ads on YouTube, which are seen as a key growth driver, Rice said.

Alphabet’s Other Bets revenue increased to US$262 million from US$150 million a year earlier, while the operating loss of US$1.09 billion narrowed from US$1.21 billion.

Other Bets includes broadband business Google Fiber, home automation products Nest, self-driving technology company Waymo as well as X, the company’s research facility that works on “moon shot” ventures.

Shares of the company fell three per cent to US$832 in extended trading after closing at US$856.98 on Nasdaq.