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Tech giant Alphabet (NASDAQ: GOOGL), formerly known as Google, unveiled quarterly earnings on Thursday after the market close. While the stock has had a great run over the past year, the momentum came to a halt because the results missed analyst expectations.
In a rare double-miss, the company failed to meet expectations on both revenue and earnings. Investors rushed for the exits, and the stock ended Friday down 5%.
Alphabet earnings posted at an adjusted $7.50 per share, on $20.26 billion of revenue. Analysts projected the company to earn $7.97 per share, on $20.37 billion of revenue.
When compared to the results in the same quarter one year ago, this performance was very impressive. After excluding the effects of foreign currency translation, revenue and earnings per share grew 23% and 15%, respectively, year-over-year.
Alphabet’s core search platform continues to do very well. Paid clicks, a key metric for the Google search engine, rose 29%, higher than the 26% analysts had expected.
On the cost side, Alphabet saw traffic acquisition costs, which are costs paid to distribution partners, jump 33% last quarter. Meanwhile, Google-related website revenue increased 20% for the period. The fact that revenue is increasing at a slower pace than costs indicates the company is experiencing some margin pressure.
The reason for this is likely the switch to mobile. As more Google users perform functions on their mobile devices rather than on desktops or laptops, Google gets more revenue from this, but at a lower margin. That’s because Alphabet has to pay partners more to reach users on their phones than on their PCs.
Separately, another lingering concern for investors moving forward is that the company continues to spend significant amounts of money on its newer ventures, without much so far to justify all that spending.
‘Other Bets’ Under Scrutiny
One of the things in Alphabet’s earnings report that investors didn’t like was the continued high level of spending on the company’s “Other Bets” category, and the lack of meaningful results thus far. Other Bets is the operating segment which houses Alphabet’s non-search or Android-related projects.
The Other Bets division includes Nest, Google Fiber, Verily (formerly known as Google Life Sciences), self-driving cars and its Ventures capital group. These are the initiatives that, while riskier in nature and less certain to pay off, could be the next home runs for the company down the road.
The good news is that revenue in the Other Bets category doubled last quarter, to $166 million.
But the bad news is that losses are escalating: Alphabet lost $802 million from Other Bets last quarter, compared to a $633 million loss in the first quarter last year.
Investors are paying a close eye to what is happening in this group, because it’s soaking up an increasing level of resources. Keep in mind that Alphabet lost $3 billion from Other Bets last year, which was double the loss from the previous year.
Don’t Give Up on Alphabet
Alphabet’s quarterly results are disappointing, but it’s important not to draw too many finite conclusions from one quarter’s worth of information.
Some context is helpful: Alphabet’s 5% share price decline hurts, but the stock is still up more than 40% in just the past year. Taking a breather from its tremendous rally is nothing to be alarmed about.
And the company still performed very well on an absolute basis. Even though its results did not meet analyst expectations, Alphabet achieved double-digit growth in revenue and earnings per share last quarter, compared to the same quarter in 2015. That’s impressive in and of itself.
Volatility comes with the territory for growth stocks. Alphabet remains a highly profitable company with a very strong brand and it is putting up solid growth rates. Despite the earnings miss, investors should stick with the stock.
Tesla, Apple and Google Are Creating This
When people think of Tesla, what immediately comes to mind is the world’s first electric car. It’s an astounding achievement. But what few people realize is that Tesla’s next technological wonder could easily put it to shame. Morgan Stanley says this breakthrough could save the American economy $1.3 trillion each year. And Tesla’s not the only one racing to get it out the door. Apple and Google are working on their own versions too.