Google’s ad business is booming, and it generated huge profits for the company, but those profits were overshadowed as Alphabet Inc (GOOG, GOOGL), the parent company, incurred huge losses from the investments it made in speculative businesses such as self-driving cars and speedy Internet access.
These investments pushed the tech giant’s first-quarter earnings below analyst expectations.
Google Will Continue Investing in Moonshots
BGC Financial analyst Colin Gillis says, “Alphabet has made it pretty clear they weren’t going to stop their investments in other areas, and they spent a little bit more than some people may have liked. You don’t necessarily like to see costs and losses growing faster than revenue, but that’s where Alphabet’s future is going to be.”
In May 2015, Ruth Porat joined the company as chief financial officer. Investors expected Porat to help curb the company’s spending, but she assured investors that their big bets are being pursued thoughtfully. Alphabet separated Google’s core business from its “other bets” or so-called “moonshots” because most of them were incurring losses for the company. Smart gadget maker Nest, speedy Internet provider Fiber and life sciences research organization Verily helped Alphabet’s Other Bets revenue double to $166 million in the first quarter. However, the division’s operating loss went up to $802 million from $633 million, and this spooked investors.
Porat said the company intends to continue investing in these opportunities in a disciplined manner but hinted that Alphabet could do away with the businesses that are performing poorly. In after-hours trading on Thursday after its earnings release, the GOOGL shares declined 6% to $732, and continued to fall in Friday morning trading. Meanwhile, in the past 12 months, they rallied 33% based on a $733 per share price as of this posting.
“The stock is just being a little ‘Googly,’” Gillis said. “There is nothing wrong with the company.”
Google’s Q1 Numbers Miss the Target
On Thursday, Alphabet reported EPS of $7.50, excluding certain items, and this came in lower than the Wall Street target of $7.96. Growth was seen in the company’s net income, which went from $3.52 billion or $5.10 a share a year ago to $4.21 billion or $6.02 a share.
The migration of Internet users from desktop computers to mobile devices is costing Google more, and this squeezed profit margins, said Porat.
However, the number of Internet users using mobile devices for search has grown, boosting total revenue for the first three months of the year to $20.26 billion versus $17.26 billion last year. Costs also went up because of data center operations, YouTube content fees and the launch of new devices, including the Nexus range of smartphones and Chromecast media streaming dongle.