Colin Sebastian, a senior analyst with Robert W. Baird & Co, told Business Insider on Monday that the “stock was weak due to lower than anticipated operating profit and much higher levels of capital expenditures.”
Alphabet’s operating income totalled $8.2 billion in Q4 (21% margin on gross revenue), which fell below Wall Street’s expectation of $8.6 billion.
On capital expenditure, Alphabet’s $25.4 billion spend was more than double the same period last year, when its total outlay was $12.6 billion.
Ali Mogharabi, a Senior Equity Analyst at Morningstar, agreed with Sebastian. He said “slightly lower margins than [Wall Street] expected” were likely the cause of the stock’s after-hours tumble on Monday.
Mogharabi thinks the lower margins represent Alphabet’s commitment to “consistently invest in the long run,” which he says is “pretty much what management said, but I agree with them.”
“You’re talking about content acquisition for YouTube, and hopefully that will attract more ad dollars and attract more subscribers. And of course, you’re talking about continuing an increase in headcount on the R&D front,” Mogharabi told us.
“Those are just some examples of where it’s going to pay off where [the company] will continue to invest in R&D. If they want to stay ahead of the game, they’re going to need to continue to invest.”
Alphabet CFO Ruth Porat did try to ease concerns about capital expenditure on the firm’s earnings call, in which she said the rate of growth will “slow meaningfully” over time.
Mogharabi did tell Busines Insider that some analysts view Alphabet’s reported traffic acquisition costs (TAC) as a negative, but he took them to be a good indicator. He points to the fact that TAC costs as a percentage of revenue were 23% for Google in Q4 2018 compared to 24% in the same period last year.
Also, Mogharabi explained that in Q2 2017 to Q2 2018, TAC was growing at a faster rate than ad revenue. That switched in Q3 2018, when TAC grew at 20% year over year and ad revenue at 21%. As reported in earnings call on Monday, those numbers continued to move in the right direction for Alphabet in Q4 2018 — TAC grew at only 15% year over year and ad revenue grew at 22%.
“So we’ve come back to ad revenue growth outpacing traffic acquisition cost growth,” Mogharabi told us. “And I think that’s a positive.”