New spending surge shows a company playing catch-up

Alphabet Inc.’s firstquarter results came with a clear message to Wall Street: 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 amid 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 and Apple. 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.

He cut his price target on Alphabet shares to $970 from $1,040, citing worse-than-expected margin compression and capex levels. The stock fell as much as 5.2 percent on Tuesday, leaving it down for the year so far.

Other tech giants are spending prodigiously, too, as they hunt for new markets. In the fourth quarter, Amazon’s capex rose 50 percent and Facebook Inc.’s spending nearly doubled.

Alphabet’s rising firstquarter investments partly reflected a $2.4 billion realestate 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.”

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 cloudcomputing 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.