Google parent Alphabet’s investment splurge makes investors twitchy, overshadows revenue growth

Shares in Google parent Alphabet Inc (NASDAQ:GOOG) were down in pre-market trading on Tuesday morning in the US after a huge investment spree spooked investors and overshadowed increased revenues in the fourth quarter.

In a statement released after-hours on Monday, the technology giant reported that fourth quarter revenues had risen 22% to US$39.3bn while its earnings per share (EPS) of US$12.77 beat expectations of US$10.86, although this figure had been lifted by an investment gain of US$1.3bn as well as an unusually low tax rate.

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Without the investment gain, the EPS stood at US$10.91 per share.

However, what really put the wind up investors was the firm’s capital spending, which came in at US$7.1bn in the final months of the year, up from US$4.3bn a year ago and taking the 2018 total to US$25.1bn, almost double the US$13.2bn figure from the year before.

Alphabet’s research & development (R&D) spending also surged 40% in the quarter to US$6bn while capital spending by Google itself had doubled in the year to US$25bn.

The group took a hit from its “other bets” unit, which invests in experimental technologies and firms, as losses in the segment widened by 77% to US$1.3bn in the quarter, although this was offset by a better performance in its advertising business, while its non-advertising arm which includes the Play Store, cloud computing, and hardware sales brought in US$6.5bn.

Added costs also came from traffic acquisition, which rose 15% year-on-year to US$7.44bn, although this was offset by a 66% jump in ad clicks on the firm’s sites and a 29% drop in cost per click.

Alphabet also said its operating margin had fallen three percentage points compared to the year before to 21%.

Growth not as “capital light” as first thought, says analyst

George Salmon, equity analyst at Hargreaves Lansdown, said that while the other bets losses “shouldn’t cause investors too much concern” as they were early stage developments, the higher capex was “more concerning” as it indicated the firm’s impressive growth “isn’t quite as capital light as had been hoped”.

Salmon added that Alphabet had generated US$5.9bn in free cash flow in the quarter, taking its total cash balance to nearly US$100bn, meaning it “clearly” had the firepower to go up against rivals like Amazon Inc (NASDAQ:AMZN).

In pre-market trading, Alphabet shares were down 2.7% at US$1,102.

Story by ProactiveInvestors