According to the news report by Reuters, Alphabet Inc., the parent company of Google, reported its fourth quarter earnings on Monday. Its report showed sharply higher spends on employees, facilities and video content, which raised concerns among investors. This led to a 3% decline in the company’s shares in late trading on Monday. Alphabet’s stocks closed the trading day up at $1141.42 per share.
While Alphabet beat Wall Street’s estimates on profit as well as revenue, the greater-than-expected spend led investors to ask whether the cash that had been invested in the company’s newer businesses would generate the same levels of returns that Google, its search engine, had.
Hargreaves Lansdown analyst George Salmon said that while the core business was still showing impressive growth, Alphabet’s massive spending proves that this growth is more capital intensive than hoped.
For the fourth quarter, Alphabet posted $31.07 billion in expenses and costs. This figure was 26% higher than the same time last year. Capital expenditures were at $7.08 billion, up by 64% compared to the previous year.
One of the reasons why spending was so high was because Google increased its staff in its cloud computing division. The search giant also spent heavily on the promotion of its consumer devices, subscription packages for YouTube and also on acquiring new office buildings in New York City as well as Silicon Valley.
The Chief Financial Officer of Alphabet Ruth Porat said that capital expenditures would reduce significantly during the course of the year, however, the company would continue long-term investments in consumer hardware, artificial intelligence services as well as emerging markets.
With regard to its performance in the fourth quarter, Alphabet posted revenues that grew by 22% from the previous year to $39.28 billion. The Wall Street consensus estimate was $38.93 billion. 83% of the total revenue was generated by Google’s advertising division.
Thanks to the busy holiday season in November and December, heavy advertising pushed up sales for the company. According to Google’s Chief Executive Officer Sundar Pichai, the number of people who were shopping directly on Google.com every day during the holiday quarter doubled as compared to the previous year.
Pichai also stated that Google’s cloud computing division doubled the number of deals it made that were over $1 million in value. He also said that their G Suite productivity software now had 5 million customers. Last year, the product had 4 million.
The company’s profit for the last quarter was $8.95 billion, which comes to $12.77 a share. Last year, at the same time, Alphabet has posted a $3 billion loss. Wall Street estimates for Alphabet’s profits were at $7.69 billion, which comes to $10.87 a share.
Alphabet’s operating margin dropped from 24% last year to 21% this time. However, a large part of that was because of the heavy spending.
James Cordwell, an analyst with Atlantic Equities said that investment should be applauded in a growth-oriented company. However, he said, there was also a lot of added expenditures being made for the cloud division and there was no clarity if those investments would give any returns. Cordwell also said that Google’s cloud division is still trailing behind Amazon.com Inc.’s Amazon Web Services cloud division.
Alphabet’s CFO also announced that the company had authorized an added $12.5 billion share buy-back program.
Investors’ biggest concerns are whether the technology giant’s future growth, especially in emerging markets, will not be able to match historical trends. Due to this they are now looking towards Alphabet’s other businesses to generate new streams of revenue. However, Alphabet has not revealed any fresh information on its new business lines so far.