What higher cost base?
Google parent Alphabet Inc. (GOOGL - Get Report) shares rose in pre-market trading Tuesday as investors focused on the internet giant's surging advertising sales and discounted, for the moment at least, a rise in costs that hammered the group's overall profitability.
Action Alerts PLUS holding Alphabet said group sales for the three months ending in March rose to $31.1 billion, topping analysts' forecasts of a $30.3 billion and rising 25% from the same period last year. A one-time tax benefit, linked to changes in the U.S. corporate tax code, as well as changes in the way it values some of its start up investments, including Uber Technologies, helped boost the group's bottom line by 72% from last year to $13.33 a share, but stripping those away reveals net profit growth of 28%, or $9.33 a share.
Traffic-acquisition costs (TAC) represented 24% of Google's total ad revenue for the quarter, up from 22% a year ago and flat with Q4, and slightly above an analyst consensus of 23.4%. Concerns about rising TAC costs led Alphabet's stock to slump after the company's previous quarterly results were released in February, and may have caused initial gains recorded right after the earnings were released this quarter to be pared as well. Alphabet reported that GAAP costs and expenses rose 33% year-over-year to $24.16 billion, outpacing revenue growth of 26%.
Overall costs, however, were a notable highlight in the report, with near term capex nearly tripling to $7.3 billion and hitting the group's overall profit margin, which fell to 22% from 27% over the first quarter of 2017.
"Our commitment to growth is evident in the trend in CapEx investment, almost equally split this quarter between compute capacity and facilities," CFO Ruth Porat told investors on a conference call following the results. "In many respects, these investments underscore ... our confidence and clarity about future opportunities with our focus on proprietary solutions that enable us to deliver the secure, reliable, high-performing compute infrastructure to support new and emerging products and services for our users, advertisers and enterprise customers."
Alphabet shares were marked 0.58% higher in pre-market trading in New York, indicating an opening bell price of $1,079.99 each, a move that would take its year-to-date advance to 2.5% compared to a 12.75% gain for the NYSE FANG+ Index, an equal weight benchmark which tracks the moves of ten of the biggest and most active tech stocks in the world. Top names include Action Alerts PLUS holdings such as Facebook (FB - Get Report) and Apple (AAPL - Get Report) .
Google, the guys who can only shoot straight, and it doesn't seem to matter to this unforgiving bunch— Jim Cramer (@jimcramer) April 24, 2018
CEO Sundar Pichai also addressed broader market concerns with respect to regulatory pressure on internet and social media firms following last month's data mis-use scandal at Facebook Inc. FB, which reports its first quarter earnings after the close of trading Wednesday.
"It's important to understand that most of our ad business is Search, where we rely on very limited information, essentially what is in the keywords to show a relevant ad or product," Pichai said. "And so we've been preparing this for 18 months, and I think we are focused on getting the compliance right. It'll be a year's long effort, and we are helping not just us but our publishers and partners."
"But overall, we think we'll be able to do all that with the positive impact for users and publishers and the advertisers and so our business," he added on the investor call.