Alphabet shares slide as Google becomes less A-B-C

As usual, Alphabet’s quarterly report bordered on surreal

Alphabet shares slide as Google becomes less A-B-C

As usual, Alphabet’s quarterly report night bordered on surreal. The Google-owner generated first quarter revenues that were about the size of a small country’s annual GDP. Alphabet said 26% growth to $31.1bn reflected ‘global momentum’. That wasn’t particularly helpful, but to an extent the figures spoke for themselves. If advertisers have concerns about personal data use or new regulations, they didn’t act on them in Q1. That was a relief for investors, reflected in a fleeting rise of Alphabet stock after hours on Monday night. By Tuesday however, the shares were losing as much as 5%. That’s despite adjusted earnings beating forecasts and EPS jumping to $13.33 from $7.73 in last year. The stock slippage showed investors were not ready to look past the backlash against dominant technology companies just yet.

New impressions

Sparse clarification about the outlook added more unreality. Fresh guidance was sorely needed after the $744bn company deployed new accounting methods to abide by new rules. These oblige companies to publish unrealised gains and losses on investments. Since Alphabet has tentacles in dozens of start-ups, investors face fresh complications when gauging its performance. For instance, about $2.4bn of unadjusted quarterly profit was down to investments in ventures like Uber and Airbnb. Alphabet also moved some interests, like smart home appliance outfit Nest, into Google. And in the ad business, it switched emphasis to 'impressions' from a previous focus on clicks.

Less like A-B-C

This all adds up to a risk of confusion at the margin when the group needs to be as transparent as possible with regulatory, ethical and competitive challenges ahead. So investors’ unimpressed reaction to a fairly respectable Q1 makes sense. More so considering that Google underlined a commitment to splurging. Q1 expenditure almost tripled to $7.3bn from $2.5bn. Executives stressed determination to meet rising demand for YouTube, Google Assistant and data analytics tools to keep pace with rivals. In short, Alphabet is prioritizing spending over margins. Group operating margin contracted again in Q1, to 22%, down from 27% a year ago. So whilst the strong global economy offers continued ad revenue growth, regulatory uncertainty and a blizzard of spending will keep Google investors nervous. At the time of writing, the stock remained capped slightly lower for the year after 2017’s 35% advance. There’s little chance Alphabet’s outlook will get much simpler anytime soon.

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