Alphabet Earnings Beat Estimates, Shares Drop

Google parent Alphabet Inc shares dropped in pre-market trading Tuesday as it reported its 1st quarter earnings, beating analysts’ estimates.

Alphabet said group sales for the 3 months ending in March climbed to $31.1 billion. It beat analysts’ expectations of a $30.3 billion and a rise of 25% from the same period last year.

On the other hand, the company’s operating profit margin declined to 22%, from 27% the previous year. It reflected the boost in spending around a number of new businesses, including hardware and cloud computing.

Consequently, Alphabet is investing to keep pace with and having to share more of its revenue with phone and browser makers, said James Cordwell, analyst at Atlantic Equities.

a glass building with the logo of google written on it
Google parent Alphabet Inc saw better-than-expected earnings in the 1st quarter.

“The jump in profits is purely due to one-time items,” he said.

Further, a one-time tax benefit helped boost the company’s bottom line by 72% from last year to $13.33 a share. However, removing those away indicates net profit growth of 28%, or $9.33 a share.

Longer-term capital expenditures nearly tripled to $7.3 billion in the 1st quarter from $2.5 billion a year ago.

Additionally, Alphabet’s profits benefited from an accounting change that required it to recognize unrealized investment gains in equity securities for the 1st time, adding $3.40 to its earnings per share.

Stripping out these gains, earning would have risen to $9.97 a share. It would be higher from $7.73 the year before and above the $9.30 analysts had been expecting.

However, it accounted much of the growth to higher pricing for online ads on its Google search engine, YouTube video service, and partner apps and websites.

“The strong economy has companies spending more on advertising and we have an ongoing migration from traditional types of media advertising to greater online and social media-based advertising,” said Ivan Feinseth, analyst at Tigress Financial Partners.

Overall traffic costs climbed 36%, taking 2 percentage points more of the company’s advertising revenues than it had the year before.

Alphabet Inc shares fell 0.20% to $1,071.61 in pre-market trading. Its shares lost 0.33% to closed lower at $1,073.81 on Monday.

Alphabet and its own global network

Meanwhile, Alphabet is creating its own global internet network. It is a multi-billion dollar endeavor that includes putting undersea cabled, building data centers, and buying computers.

“On machines, the biggest contributor is the demand we’re seeing,” said Alphabet CFO Ruth Porat. “In particular, it’s the expanding application of machine learning across Alphabet, plus the requirements for cloud and search and YouTube.”

“And secondly, the increased costs of newer technologies: CPUs, memory, network,” Porat added.

Currently, Google has 20 new data centers in construction across the world, she said.

Since Google continues to grow and that completion from the likes of Facebook and Amazon is also growing, it’s a budget item that probably won’t go away.

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