What’s Going On Here?Google-parent Alphabet announced weaker-than-expected fourth-quarter earnings on Monday, and – like a grad student dishing up cold Alphabetti Spaghetti – the tech giant looked at the disappointing results and asked itself, “Surely I can do better?” What Does This Mean?Alphabet’s overall revenue, made up mostly of Google’s advertising business, fell just short of investors’ forecasts. But the real issue was the company’s costs – including those it pays the likes of Apple to distribute its mobile ads – which came in higher than expected. They meant Alphabet’s quarterly profit from its business activities (its “operating profit”) missed targets too.
Still, at least Alphabet revealed exactly how much Google makes from YouTube ads and its cloud computing segment for the first time. Investors might welcome that transparency: Google’s reportedly threatened to quit the cloud business if it’s not the second-biggest there is by 2023 (tweet this). Why Should I Care?For markets: Investors look to the skies.
Google’s operating profit margin has fallen every year since 2017, but analysts think growth in its highly-profitable cloud business could turn that around this year. In fact, 90% of investment bank analysts currently rate Alphabet’s stock a buy, and even Monday’s 3% share price drop is unlikely to change that. Its share price, then, probably already takes their high expectations into account. Trouble is, if Alphabet wants to keep boosting its shares, it’ll probably need to increase those margins by even more than predicted.
The bigger picture: The next $100 billion.
Investors taking a longer-term view might look to Alphabet’s other ventures as a source of future profit. Take Waymo: analysts reckon that between the growing ride-hailing market and future sales of self-driving cars, the Alphabet-backed autonomous vehicle company could be worth as much as $135 billion. But very little, if any, of that potential value is currently reflected in Alphabet’s current share price. And if new investors decide that’s an unfair oversight and start buying up Alphabet’s shares, current investors could be in for a windfall. | 