Alphabet profit margins narrow
Share price of Google parent drops 2.5% as internet giant’s capital spending jumps 80% amid cloud and YouTube expansion plans
Google parent Alphabet reported thinner profit margins as the internet giant spent heavily to expand its cloud and YouTube businesses.
Google’s parent company Alphabet reported thinner profit margins as the internet giant spent heavily to expand its cloud and YouTube businesses.
Google’s fourth-quarter capital spending jumped 80% to $6.85bn. Its operating margin was 21%, down from 24%.
Alphabet’s share price was down 2.5% in premarket morning trading in New York on Tuesday. Alphabet is relying on its advertising business to support profit growth as it develops new offerings such as cloud services and consumer hardware.
The company’s highergrowth businesses, which also include YouTube, are less profitable than the original Google desktop search service.
“Capex [capital expenditure] is growing at a sizable clip and the primary driver continues to be investing in technical infrastructure to support growth,” said Alphabet CFO Ruth Porat.
“By that we mean data centres and machines. This reflects our outlook for global growth in ads, search, YouTube and cloud.”
Costs were also pushed higher by hiring, mostly for the cloud business, she said.
Alphabet had 98,771 employees at the end of 2018, up 23% from a year earlier. Porat said headcount growth should moderate in 2019.
The company also spent heavily on YouTube, which shares a lot of its advertising revenue with content creators and larger media partners.
Google is asking shareholders to trust that investments in future growth will pay off, but the company discloses limited financial details on its newer initiatives. YouTube numbers are buried inside Google, while cloud and hardware results are part of Alphabet’s Other Bets revenue line.
“If Google really wants to see more of a sum-of-its-parts valuation from investors, they’re going to have to start disclosing,” said Aaron Kessler, an analyst at Raymond James.
Alphabet’s share price fell 3% in extended trading. Earlier, it closed at $1,141.42 in regular New York trading. The stock has gained 9.2% so far this year.
Fourth-quarter sales, minus fees paid to partners, climbed 23% to $31.84bn, the internet giant said on Monday.
Analysts on average were expecting $31.33bn, according to data compiled by Bloomberg.
Net income was $12.77 a share, compared with a loss of $4.35 per share a year earlier, when a one-time tax expense wiped out profit.
Online commerce grew quickly in the final quarter of 2018, helping Google’s advertising business. When shoppers hunt for holiday gifts, they often use Google’s search engine, letting the company send them targeted product adverts based on those queries.
The number of clicks on adverts that Google ran on its own services surged 66% in the fourth quarter, versus the 2017 holiday period.
Sales growth of 23% “is very good for what is viewed as a mature business”, said Christopher Rossbach, chief investment officer of private investment office J Stern & Co. “We are confident that Google will continue to have rising paid click volumes for the foreseeable future.”
The firm’s advertising business is built on the collection of data about billions of people, a practice that is increasingly being scrutinised. Last month, French privacy regulators fined Google €50m for not giving consumers enough information when it asked them to sign over access to their information.
Still, adverts from Google and rival Facebook are more relevant and effective than most other options precisely because the companies collect so much information on activity across the internet and beyond.
New privacy rules in Europe, known as General Data Protection Regulation (GDPR), may have limited this data harvesting slightly, but that has hit smaller competitors more than the two digital giants.
Facebook results beat Wall Street estimates last week.
“We are encouraged that the GDPR regulations have improved the rights of European users whilst not having had a significant negative effect on the operations of Google,” Rossbach said. He said the “fundamentals of their advertising business remain intact”.
Rossbach is pleased that Google is spending heavily on YouTube, cloud and hardware. The investor is also bullish about Waymo, Alphabet’s autonomous vehicle unit.
CEO Sundar Pichai said the cloud operation is “getting large wins” and Porat noted that it is one of the fastest-growing businesses at Alphabet.
Other Bets, which includes Waymo, generated revenue of $154m, up 18% from a year earlier. Operating losses were $1.33bn. Porat said Waymo is having conversations with a number of cities about a driverless car service. Right now, there is a limited paid service in the Phoenix area.
Alphabet’s cash and other short-term holdings totalled $109.14bn at the end of 2018. The firm is spending some of that on buying back an additional $12.5bn of its Class C shares.
The cash hoard has also sparked speculation among some analysts that Alphabet will make a major acquisition to boost its cloud business.
“Acquisitions are an attractive complement to what we do to drive organic growth,” Porat said on Monday. “We did more last year than prior, but they were small. We are very open to acquisitions.”