Alphabet Shares Fall After Earnings on Concerns of New Spending

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(Bloomberg) -- Alphabet Inc. shares fell after first-quarter results sparked concern 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 despite 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.

The shares fell 2.9 percent to $1,042.97 at 9:40 a.m. in New York. A handful of analysts, including Wieser, cut their price targets on the stock.

Alphabet’s rising first-quarter investments partly reflected a $2.4 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.

Chief Executive Officer Sundar Pichai told investors that Google’s nascent hardware unit, which builds smartphones and speakers rivaling 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. Google’s cloud-computing service will likely generate as much as $2.5 billion in sales this year, according to Forrester Research estimates. That’s a fraction of the revenue Amazon Web Services pulls in each quarter. Google sold about 2 million Pixel phones in the fourth quarter, UBS estimated. Apple sold 77 million iPhones in that period.

Google’s higher spending in the first quarter shaved operating profit margins to 22 percent from 27 percent a year earlier. UBS analyst Eric Sheridan said that this volatility is the "new normal" for the company as it expands its cloud business, spends more on marketing consumer devices and YouTube invests in more original content.

©2018 Bloomberg L.P.

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