Alphabet reports worse-than-expected quarterly profits
The world’s dominant provider of internet search, advertising, and video services, Alphabet, (Google’s parent company) seems to have lost its way. Its stock fell as much as 4% in after-hours trading this Monday after it reported it missed analyst expectations and posted a 23% decline in profit as it faces rising expenses.
Though Alphabet’s overall revenue didn’t disappoint, its paramount advertising business did: the clicks on advertisements across Google’s properties (i.e. Youtube, the Google Play store, Google.com) grew by only half as much as analysts had predicted.
The disappointing earnings come as Google faces major challenges internally and from outside regulators. In September, 48 state attorneys general announced inquiries into Facebook and Google as calls to break up big tech companies increase. Elizabeth Warren, Bernie Sanders, and other Democratic Candidates in the 2020 presidential election have made antitrust issues central to their campaigns.
Alphabet has increased spending in recent years on areas including cloud computing and consumer electronics that it views as essential to maintaining its industry leadership.
This is likely to worry investors, who might now treat April’s revenue miss as the start of a downward trend. Investors might be hoping other revenue sources will point Alphabet in the right direction. Cloud computing could be the answer, but growth has been slowing with increased competition from Amazon and Microsoft. Instead, Alphabet might have better luck with new hardware ventures: it has reportedly made an offer to buy the billion-dollar fitness tracker company Fitbit – causing the latter’s shares to sprint upwards Monday.
Alphabet’s update might push investors further away from fast growing companies’ shares (AKA “growth” stocks) and towards relatively cheap, overlooked “value” stocks. On Monday, investment bank Morgan Stanley branded growth stocks as overpriced, and warned their prices might not rise much as investors search for bargains.
Additionally, on Friday, Microsoft secured a hotly contested $10 billion cloud computing deal with the US Defense Department. Wedbush analyst Dan Ives called the deal a “game changer” for Microsoft, writing in a note to clients that the deal “will have a ripple effect for the company’s cloud business for years to come.” Alphabet – which withdrew from contention because its employees thought military collaboration conflicted with the company’s values – might now have qualms. It’s a reminder to keep tabs on your investments if you’re building a “socially responsibe” portfolio. Microsoft might’ve won the lucrative contract, but it might now see its currently high environmental, social, and governance (ESG) ranking start to fall.
