Alphabet stock falls after Google beats on earnings but sales come up short

Alphabet earnings were much higher than expected, but sales came in a little short.

Shares decline 3% after slight miss on sales that accounted for traffic-acquisition costs

Alphabet Inc. stock fell roughly 4% in the extended session Thursday after the company reported better-than-expected profits that handily beat Wall Street expectations but missed revenue projections.

Profits clocked in at $9.19 billion for the third quarter, or $13.06 a share, much higher than analysts’ average expectations of $10.42 a share, according to FactSet. Much like the past several quarters, a significant chunk of Alphabet GOOGL, -6.17% GOOG, -6.11% profits were related to its investments: the company said it added $1.38 billion to the bottom line because of gains in equity securities. A change in accounting standards earlier this year triggered these types of disclosures.

Several years ago investors had regarded Alphabet’s investments in various portfolio companies as something of a waste of cash and time, says founder and managing partner Trip Miller of Gullane Capital Partners, which owns a position in Alphabet.

“People were complaining [Alphabet] had burned a lot of money and there was a drag,” he said in a phone interview late Thursday. “We look at the cash and the investment portfolio, and we think there is a private equity-like portfolio that has the optionality to generate cash flow or one-time earnings. We see that as a hidden asset that is worth a whole lot more now.”

Overall, Alphabet reported revenue of $33.74 billion, up from $27.77 billion in the year-ago period. “Our business continues to have strong momentum globally, led by mobile search and our many products that help billions of people every day,” Alphabet Chief Financial Officer Ruth Porat said in a statement with the earnings release.

Google produces the vast majority of Alphabet’s sales, with most of that huge pile of cash coming from Google’s advertising products. Combined, the Google unit of Alphabet reported $27.01 billion in revenue, up from $21.97 billion in the year-earlier period, after accounting for traffic-acquisition costs, or TAC, the amount of revenue that goes to other businesses to send eyeballs to Google sites and its network. Analysts expected ex-TAC sales of $27.3 billion, according to FactSet.

Google’s properties hauled in $24.05 billion, while the company’s network of non-Google sites that show its ads reported sales of $4.9 billion.

But Inc. AMZN, -10.22% which also reported earnings Thursday after the closing bell may be eating into some of Google’s market share for ads. “We’re seeing a larger than expected slowdown in Google properties’ revenue, representing its core search business,” eMarketer analyst Monica Peart wrote in an email. “This is likely related to the ramp-up in competition from Amazon, as consumers increasingly turn to the e-commerce giant for their product searches.”

Beyond disclosing what cash comes from Google’s sites — such as Google Search and Gmail — and its network, the company doesn’t break out more information. For example, analysts say that YouTube is a multibillion-dollar business, but the company does not report its actual size.

“Net-net we see positive progress, whether it meets Wall Street expectations or not,” Miller said. “Things have been very much priced for perfection in this market. [Alphabet] is a business that’s growing, regardless what the economy or the markets do in the short run.”

Google’s ad units haul in the lion’s share of the cash, but Google operates several non-ad businesses under the Google Other segment, which includes its cloud-computing platform, hardware sales such as the Pixel phones and Google Home speakers, as well as revenue from its Play Store. Together, those businesses reported revenue of $4.64 billion, up from $3.59 billion a year ago. Analysts on average expected those businesses to provide $4.81 billion in sales, according to FactSet.

Alphabet said earlier this year that its cloud unit saw revenue of $1 billion per quarter — Miller says that it’s a nice “mile marker” but doesn’t mean “a whole lot” to his team — and has not given an update since. On the earnings conference call Porat said significant portions of capital expenditures were related to support the company’s cloud offerings, machines being the largest component. She also said data-center construction is an increasing percentage of capital investments and that the company is developing 20 data centers around the world. Alphabet reported $5.28 billion in capital-expenditure spending, up from $3.54 billion in the year-earlier period.

Alphabet’s “Other Bets,” which are experimental companies that are outside of Google but within Alphabet’s corporate structure, reported losses of $727 million, widening from $650 million in last year’s quarter. Other Bets revenue rose to $146 million from $117 million.

Alphabet stock has gained 4.8% in the past year, while the S&P 500 SPX, +1.86% index has fallen 0.7%.

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