Investors are selling off Google shares after hours in the wake of its earnings report this afternoon.
The stock is down more than 5% as of 6:30 ET.
The company showed strong revenue growth — 27%, from a high base — and huge positive cash flow.
But expenses also expanded at a rate that one analyst called “previously unthinkable.” (Jordan Rohan of Stifel.)
Not including cost of revenue (mainly traffic acquisition), operating expenses were up a startling 54% from last year’s quarter, coming in at $2.84 billion. Capital expenditures also nearly tripled from last year, to $890 million.
On the earnings call, Google explained what it’s spending all that money on:
- New hires. Google hired 1,900 employees during the quarter, bringing the total to 26,316. A lot of these employees were in “growth” areas (read: not search, and not as profitable as search) like YouTube, Chrome, and Enterprise. The company said now is the time to build, since it’s seeing great revenue growth across all its businesses. It plans to hire more than 6,000 people this year.
- Retention. Google gave all employees a 10% raise toward the end of last year, and this is the first complete quarter where it showed up on earnings. The bonus had a disproportionate effect this quarter because it also flows through to other compensation like vacation and 401(k) pension plans, and those added expenses were all counted this quarter.
- Advertising. Google also did more advertising last quarter, particularly for newer products like Chrome.
- Facilities. The capex spend was mainly to buy new buildings in Dublin, Ireland and Paris, France, as well as for continued data centre buildouts.
As Rohan points out, short-term investors may look at these expenses as evidence that Larry Page will not manage Google as tightly as Eric Schmidt did. But long-term investors might consider that it shows an incredible confidence in its revenue growth prospects.
Rohan maintains a “buy” rating on the stock and a target of $775.