Alphabet’s Revenue Grows 22%, But Margins Shrink

Alphabet Inc reported sharply higher fourth-quarter spending on video content, employees and facilities, worrying investors who sent the tech company’s shares down about 3 percent after hours on Monday.

Reuters reports Google’s parent company beat Wall Street’s estimates for revenue and profit, but the bigger-than-expected spending prompted investors to question whether cash funneled into Alphabet’s newer businesses will generate the returns that its search engine unit historically has.

“While the core business is still growing impressively, the significant spending shows growth isn’t quite as capital-light as had been hoped,” said George Salmon, a stock analyst at financial firm Hargreaves Lansdown.

The company reported $31.07 billion in total fourth-quarter costs and expenses, up 26 percent from last year. Capital expenditures rose 64 percent compared to last year, up to $7.08 billion.

Ruth Porat

Spending was pushed higher by Google boosting staffing on its cloud computing division, promoting its consumer devices and YouTube subscription packages and acquiring office buildings in Silicon Valley and New York City.

Alphabet Chief Financial Officer Ruth Porat told analysts that capital expenditures would moderate significantly this year, but the company would continue to invest in long-term bets on artificial intelligence services, consumer hardware and emerging markets.

Alphabet’s fourth-quarter revenue rose 22 percent from a year ago to $39.28 billion, compared with Wall Street’s average estimate of $38.93 billion, according to IBES data from Refinitiv. About 83 percent of the revenue came from Google’s ad system.

Heavy advertising in the run-up to the holiday shopping season boosted sales. Google Chief Executive Sundar Pichai told analysts the number of people shopping on Google.com each day during the holidays doubled over last year.

Profit for the quarter was $8.95 billion, or $12.77 per share, compared with a $3 billion loss a year ago. That beat analysts’ average estimates of $7.69 billion, or $10.87 per share. Partly because of the higher spending, Alphabet’s operating margin was 21 percent, down from 24 percent in the year-ago period.