Alphabet shares leap as Google beats estimates, but Cloud lags

Alphabet Inc on Tuesday beat fourth-quarter sales expectations as advertising customers unleashed budgets for the holidays, and the Google owner disclosed for the first time that its Cloud unit is losing $5.6bn a year.

Shares of Alphabet, up 9.5 percent this year, rose 7 percent after hours to $2,053.75.

Google’s advertising business, including YouTube, accounted for 81 percent of Alphabet’s $56.898bn in fourth-quarter sales, which rose 23 percent compared with a year ago. Budget cuts by travel and entertainment advertisers in 2020 were nearly made up as the year went on by new spending from retail and other clients who were driven online by the COVID-19 pandemic.

Analysts tracked by Refinitiv had estimated quarterly revenue of $53.129bn, or growth of 15.31 percent.

The Cloud disclosure marks a major milestone for Google, which generates more revenue from internet advertising than any company globally. Google for years has faced questions over whether it can spin the cash from its advertising business into a newly profitable venture.

Alphabet said Google Cloud posted a quarterly operating loss of $1.24bn. Google Cloud sales were $3.831bn, or $13.059bn for the full year, up 46 percent from 2019.

The full-year Cloud operating loss widened 21 percent to $5.6bn.

Over the last year, as Google Chief Executive Sundar Pichai added the title of Alphabet CEO, he has given investors greater clarity into the sprawling company’s performance. Before sharing Cloud costs and operating income, the company started disclosing Cloud and YouTube advertising sales.

Revenue from the Google Play mobile app store, YouTube subscriptions and consumer products is still lumped into one category. Sales from small businesses Alphabet calls “other bets” including internet provider Google Fiber, artificial intelligence software maker DeepMind and health technology business Verily are separately grouped together.

Alphabet’s quarterly profit rose 43 percent to $15.2bn, or $22.30 per share, compared with the average estimate of $10.895bn, or $15.95 per share.

Alphabet’s revenue, which for years had consistently increased by about 20 percent annually, increased by just 12.8 percent in 2020. That marked its slowest growth since 8.5 percent during the Great Recession in 2009.

The company remains undervalued compared with some rivals. Microsoft Corp shares entering Tuesday traded at 10 times expected revenue over the next 12 months and Facebook Inc seven times, while Alphabet shares were about six times.

Google’s lead over the global internet advertising market is shrinking as Amazon.com Inc becomes a bigger threat and China-focused vendors such as Alibaba enjoy a faster rebound from the pandemic. Last week, research company eMarketer estimated Google will capture 30 percent of the market in 2021 while increasing sales by 18 percent to $117bn.

Google is fighting antitrust investigations or charges across Australia, Asia, Europe and North America.

In addition, Google has threatened to pull its search engine from Australia if the country enforces new rules that would require the company to negotiate fair payments to news publishers to include their content in results.

Analysts also have expressed concern about potential revisions to content moderation laws under new US President Joe Biden. Those laws currently favour companies such as Google.

Alphabet also is monitoring a nascent worker unionization effort and facing ongoing criticism about its underperformance in hiring and retaining women and racial minorities.