Google spending surge shows a firm playing catch-up
Alphabet Inc.’s first-quarter 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 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.
Other tech giants are spending prodigiously, too, as they hunt for new markets. In the fourth quar$2.4 ter, Amazon’s capex rose 50% and Facebook Inc.’s spending nearly doubled.
Alphabet’s rising first-quarter investments partly reflected a 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.
CEO Sundar Pichai told investors that Google’s nascent hardware unit, which builds smartphones and speakers rivalling 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.
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