As Google invests in new areas, Alphabet misses earnings forecast

Under intense regulatory pressure, the search giant looks to broaden its business beyond search, advertising and video.

Google has bet big on a wide variety of products and services, with its core business encumbered by government scrutiny [Google/Reuters]
Google has bet big on a wide variety of products and services, with its core business encumbered by government scrutiny [Google/Reuters]

Google parent Alphabet Inc missed analysts’ estimates for quarterly profit on Monday as it reported its highest-ever quarterly expenses, sending shares down even though revenue growth topped expectations.

The world’s dominant provider of internet search, advertising and video services has increased spending in recent years on certain new business areas – including cloud computing and consumer electronics – that it views as essential to maintaining its industry leadership in the face of stiff competition from Inc and Microsoft Corp.

Google, however, provides limited product-level financial disclosures to United States government agencies compared with some peers, leaving investors increasingly uncertain about how regulatory scrutiny, advertiser boycotts and global trade tensions are affecting operations.

As a result, analysts say Alphabet shares have underperformed relative to rivals, rising 17 percent in the last year – compared with a 33 percent gain for Microsoft and a 29 percent increase for Facebook Inc, the internet’s second-biggest seller of advertising.

Shares of Google closed 1.95 percent higher in regular trading on Monday. The shares rose on news that Google had made an offer to acquire US wearable-device maker Fitbit Inc. But Alphabet shares two percent in after-hours trade to $1,264.

‘A hint of pessimism’

Google has tried to demonstrate that its cloud-computing business is roaring, disclosing last quarter about two billion dollars in revenue and saying that plans continued to hire thousands for that unit to stoke growth.

Haris Anwar, analyst at financial markets platform, said the quarterly results cast a cloud. “An earnings miss at a time when the Big Tech companies are being probed for their business practices adds to the uncertainty and creates a hint of pessimism around the company,” he said in an email to the Reuters news agency.

In hardware, Google’s debut in May of the Pixel 3a – its most affordable smartphone yet – went well according to technology analysts. It boosted Google’s overall smartphone sales this summer in a typically slow quarter.

Google also has tried to reassure investors that there is no weakness in its YouTube video unit, while expressing confidence in its business overall through share buybacks.

But cash continues to be spent and higher costs loom as Google prepares for intensified clashes with regulators. Total expenses in the third quarter reached $31.3bn, about 25 percent higher than a year ago and topping the previous high of $31.1bn in the fourth quarter of 2018.

Google has previously acknowledged investigations by the US Congress, Department of Justice and 48 states into the company’s competitive practices. It settled a privacy investigation by the Federal Trade Commission.

It also got an additional 90-day reprieve from an export ban that would restrict its relationship with Chinese smartphone maker Huawei, one of its top partners in distributing mobile apps.

Google has said it is cooperating with the increased scrutiny, while saying that it has survived calls for increased regulation many times.

Alphabet, which generates about 85 percent of its revenue from sales of ad space and ad technology, reported total third-quarter revenue of $40.5bn. That was up 20 percent over last year. Net income for the third quarter rose to $7.1bn, or $10.12 per share.

Source: Reuters

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