- Google’s parent company, Alphabet, beat Wall Street revenue targets for its 2018 holiday quarter, yet its stock sank 3% in after-hours trading on Monday.
- One analyst told Business Insider that investors might have been shaken by “lower than anticipated operating profit and much higher levels of capital expenditures.”
- Alphabet’s $US25.4 billion spend was more than double that of the same period in the previous year.
- Others have viewed the company’s total acquisition cost of 23% as a possible deterrent, but one analyst said he thought that number was promising in the fourth quarter.
Colin Sebastian, a senior analyst with Robert W. Baird & Co., told Business Insider on Monday that the stock “was weak due to lower than anticipated operating profit and much higher levels of capital expenditures.”
Alphabet’s operating income totaled $US8.2 billion in the fourth quarter (21% margin on gross revenue), which fell below Wall Street’s expectation of $US8.6 billion.
On capital expenditure, Alphabet’s $US25.4 billion spend was more than double that of the same period in the previous year, when its total outlay was $US12.6 billion.
Ali Mogharabi, a senior equity analyst at Morningstar, agreed with Sebastian. He said “slightly lower margins” than Wall Street expected were most likely the cause of the stock’s after-hours tumble on Monday.
Mogharabi thinks the lower margins represent Alphabet’s commitment to “consistently invest in the long run,” which he says is “pretty much what management said, but I agree with them.”
“You’re talking about content acquisition for YouTube, and hopefully that will attract more ad dollars and attract more subscribers. And of course, you’re talking about continuing an increase in headcount on the R&D front,” Mogharabi said.
“If they want to stay ahead of the game,” he added, “they’re going to need to continue to invest.”
Alphabet CFO Ruth Porat tried to ease concerns about capital expenditure on the firm’s earnings call, in which she said the rate of growth would “slow meaningfully” over time.
Mogharabi did tell Business Insider that some analysts viewed Alphabet’s reported traffic-acquisition costs as a negative, but he took them to be a good indicator. He points to the fact that the costs as a percentage of revenue were 23% for Google in the fourth quarter compared with 24% in the same period for the previous year.
Also, Mogharabi said that from the second quarter of 2017 to the same quarter in 2018, traffic-acquisition costs were growing at a faster rate than ad revenue. That switched in the third quarter of 2018, when the costs grew by 20% year-over-year and ad revenue at 21%. As reported in Monday’s earnings call, those numbers continued to move in the right direction for Alphabet in the fourth quarter of 2018 – traffic-acquisition costs grew at only 15% year-over-year and ad revenue grew at 22%.
“So we’ve come back to ad revenue growth outpacing traffic acquisition cost growth,” Mogharabi told us. “And I think that’s a positive.”
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