Google parent shows cost of branching out
Alphabet’s revenue grows 22%, but margins shrink as investment beyond search mount Alphabet’s per-share earnings came in at $12.77, beating expectations, on total profit of $9 billion.
Google’s parent company posted a big jump in quarterly revenue but also ever-rising costs outside its core online-advertising business, showing the drag from its efforts to diversify.
Despite monster results in internet search, Alphabet Inc. shares fell in after-hours trading Monday as investors zeroed in on shrinking margins and slower revenue growth overall.
Alphabet, with its tentacles stretching across the technology industry, is central to a sector that has become a bellwether for the U.S. stock market. The business empire formerly known as simply Google includes the eponymous search engine as well as its closely watched YouTube division and high-profile Waymo self-driving-car unit. Ramped-up spending on those ancillary businesses in the fourth quarter helped push margins down to 21%, from 24% in the year-earlier period.
Alphabet’s per-share earnings came in at $12.77 for the latest quarter, beating Wall Street expectations, on total profit of almost $9 billion. Revenue of $39.28 billion for the quarter and $136.82 billion for the full year represented a big jump from $32.3 billion and $110 billion, respectfully, a year earlier.
The latest quarter also brought a record research and development bill: $6 billion, up 40%.
Alphabet’s report closes on a mixed bag of year-end results for Silicon Valley’s tech giants, with international factors among the largest variables. Apple Inc.’s revenue and profit declined in part due to weak- ness in China, while Amazon.com Inc. warned that government restrictions in India could pinch its revenue there.
Facebook Inc., meanwhile, posted a record profit, aided by its workmanlike ability to squeeze more money and time out of users in the U.S. and Canada—its most lucrative markets—despite mounting public criticism of its practices.
By some metrics, too, Alphabet’s growth seems unrelenting. To the chagrin of new-media startups recently forced to lay off staff, Facebook and Google continue to capture the bulk of online advertising dollars.
But if the Google advertising juggernaut faces few major threats, analysts and investors are still eager for hints on the performance of Alphabet’s other units. The company remains tight-lipped about their profitability.
On the quarterly call Monday, Google Chief Executive Sundar Pichai took time to hail the success of the artist Ariana Grande’s music video for the single “thank u, next” on YouTube. But he and finance chief Ruth Porat declined to break out the unit’s financial results, beyond saying that costs are rising amid torrid competition for content.
Mr. Pichai said he sees YouTube as a future showcase for the company alongside its powerhouse search business. “In the long run, for me, YouTube is a place where we see users come not only for entertainment,” he said. “They come to find information.”
Alphabet likewise has declined to detail much in its Other Bets category, which includes the company’s furtive ef- forts to develop advanced technologies.
Asked directly about spending on such moonshots, Ms. Porat said: “We are investing across Other Bets commensurate with what we think is required.”
Analysts and investors warn they expect costs outside search to build as Alphabet invests further in its cloud business and other areas that require expensive, in-demand engineering talent. Despite years of efforts, Google Cloud badly trails competitors like Amazon and Microsoft Corp. The division replaced its chief executive last month.
“Artificial intelligence and machine learning don’t come cheap,” said Colin Sebastian, senior research analyst at Robert W. Baird & Co.
Alphabet shares were up 9% this year through Monday’s regular session, after being clobbered, along with peers, in the back half of 2018. They fell 3% to $1,106 in after-hours trading following the release of the quarterly numbers.
Unlike competitors flayed in recent months for high-profile privacy violations, Alphabet has mostly stayed out of the headlines. The company has kept attention on its financial story, and the earnings offered mixed results on that front.
Overall revenue growth of 22% came in around the rate that analysts have come to expect, though lower than in 2017’s final period.
The Mountain View, Calif.based company, with a burgeoning presence in new technology hubs like New York and Nashville, continues to be a magnet for talent. Head count rose to 98,771, more than dou- ble the total five years ago. Shares doubled over the period. Ms. Porat said Monday she expects hiring to slow soon.
So-called traffic acquisition cost, a measure of payments from Google to outsiders like wireless carriers to place ads, rose to $7.4 billion for the quarter, from $6.5 billion a year earlier. Analysts worry such costs may account for a steadily rising portion of revenue as Google relies more heavily on mobile advertising.
Alphabet executives have said they expect to clamp down on such costs, in part by selling more products directly to consumers, but devices like the Pixel phone remain stubbornly unpopular. Google is as dependent as ever on its competitors’ hardware to reach customers, and Monday’s results do little to change that impression.