Alphabet Shares Slide After Q4 Earnings Open Google's Black Box

Google added two new metrics to its fourth quarter earnings report, but slower-than-expected revenue growth from YouTube and Cloud services offset a solid bottom line for the trillion dollar tech giant.
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Alphabet Inc.  (GOOGL) - Get Report shares slipped lower Tuesday after the Google parent unveiled a detailed fourth quarter earnings report that shed new light on its myriad business, but indicated mixed results from some of its key properties. 

Google said earnings for the three months ending in December rose 20.2% from last year to $15.35 per share, well ahead of Street forecasts, but posted overall revenues of $46.08 billion, a 17.3% growth that missed analysts' estimates. 

Google also provided detail on two of its key business units -- YouTube and Cloud -- for the first time, with both showing solid, but perhaps not spectacular, revenue growth rates that caught investors off-guard. 

YouTube revenues were pegged at $4.717 billion and $15.1 billion for the year, compared to a thumbnail forecast of $25 billion, while Cloud services sales grew 53% from last year to $2.614 billion, trailing that of rival Microsoft's  (MSFT) - Get Report Azure platform. Search revenues which rose 17% to $27.2 billion, also trailed growth rates at Facebook  (FB) - Get Report and Amazon  (AMZN) - Get Report

"I think when you look at the fact that people are consuming a lot of goods and services as part of their experience in YouTube, how can we create better commerce experiences also is a big opportunity for us," CEO Sundar Pichai told investors on a conference call late Monday. "So looking across, I think, there is more room, significantly more room, over the mid to long term on monetization levels. And so I think we see that as a big opportunity and are investing for it."

"On Cloud, definitely we are increasingly doing much larger deals. And these deals can sometimes span beyond Cloud as well and they can touch many areas," he added. "These are large deals, and we do want to build these in a sustainable way so that we can serve the partner well, and so profitability has been something we are very focused on as well." 

Google shares were marked 3.8% lower in early trading Tuesday to change hands at $1,425.85 each, a move that would trim the stock's six-month gain to around 24% and value the Mountain View, California-based tech giant at just under $985 billion.

Ad revenues rose 16.7% from last year to $37.934 billion, Google said, but that growth rate only just outpaced traffic acquisition costs, which rose 14.3% to $8.5 billion. Total expenses, in fact, were pegged 18.5% higher from last year at $36.81 billion as total hiring rose 20.4% to 118,899 employees worldwide.

"New disclosures around the size of YouTube and Cloud should help investor sentiment and highlight the stability of the core Search revenue stream and an increasing contribution from Cloud, which reached a $10 billion annual run rate in the quarter," said Canccord Genuity analyst Maria Ripps, who carries a buy rating with a $1,600.00 price target on the stock. 

"Continued investments in Cloud and other key areas will likely drive modestly elevated spending this year," she added. "However, top line growth in the high teens, moderating gross margin compression, and ongoing share repurchases should help support EPS growth going forward. We think this pairs well with a reasonable valuation and expect any weakness related to these Q4 results to be short-lived."