Alphabet smashes expectations – but rising costs make investors skittish
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Alphabet smashes expectations – but rising costs make investors skittish

Internet titan Alphabet, the company once-known as Google (and now parent to the ‘new’ Google, which is basically search, advertising, and anything else with the Google name) reported earnings this week that smashed analysts’ expectations out of the park. Despite this, the company’s share price wobbled – a result of investors’ concern about the rising cost of web traffic acquisition. Spending this cash is non-optional for Google. The company’s major revenue generator is its digital ads service, and without enough traffic, that dries up. But is there anything to worry about?

Google’s share price wobbled, but ultimately recovered, after the release of an incredibly strong set of results

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Source: Yahoo Finance

Before we get to investor sentiment and traffic acquisition, here are the figures Alphabet reported at the start of the week. Earnings came in very strong at $12.77 share. This overshot the Street’s estimates ($10.82) by a considerable margin. It’s also a huge jump from the year-ago figure of $4.35 per share. Alphabet also beat the Street (albeit, more modestly) on revenue, reporting $39.28 billion for the quarter against consensus estimates of $38.93 billion. Finally, despite it being a sore point for investors, Alphabet actually paid less for traffic acquisition than analysts had predicted. The company said traffic acquisition costs came in at $7.44 billion (a 15% rise, year on year) – analysts had expected a figure of $7.62 billion.

Now, despite beating the Street on traffic acquisition costs, Alphabet suffered after-hours on Monday. The reason is that the cost of traffic is rising. This quarter, traffic acquisition came in at 23% of ad revenues. Compounding this concern for investors was the lower price Alphabet was charging for digital ads. Cost per click on Google properties dropped 29% year on year, and 9% sequentially. There might be a variety of reasons for this drop – but investors are concerned that it signals an erosion of Alphabet’s pricing power.

Google’s core business, digital ads, is the main driver of Alphabet’s revenues – so investors pay a lot of attention to it. But it’s worth remembering that the company’s results around revenue and traffic acquisition were better than expected. And, of course, that Google’s ad business remains incredibly profitable. What’s more, Google is still clearly the market leader in this segment, and that is unlikely to change any time soon. When you also consider that Google is still managing to grow at an incredible rate (thanks, in part, to things like cloud computing and mobile phone operating systems), it’s hard to consider these results as anything other than positive.

Ultimately, at time of writing, investors seem to agree, having reversed the share price’s downwards trend and leaving Alphabet up some 9% over the first month of the year.

Disclosure

Dominion holds Alphabet in its Global Trends Ecommerce Fund.


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