Alphabet reports slowing ad revenue in Q1, disappointing analysts
Google parent company Alphabet reported a slowdown in its ad revenue growth for the first quarter, disappointing analysts who sent its stock tumbling 7% in after-hours trading on Monday.
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Investors were not happy about Alphabet’s 17% rise in its revenue up to $36.3bn either, as it came in below the $37.3bn expected in a survey of analysts on the Street as per Refinitiv.
Google's advertising sales, its biggest revenue stream, printed at $30.7bn, which was short of the $31.4bn anticipated by analysts.
Its first quarter performance on that front also marked a slowdown in its ad sales growth from 24% one year ago to 15% this time around.
Sales from its Play Store and Google Cloud were also weaker than expected at $5.4bn (consensus: $5.6bn).
Chief Executive Sundar Pichai said investors should expect a slowdown in revenues as the company focuses on the long-term.
“You are going to have quarter-to-quarter variations once in a while, but we remain confident about the opportunities we see.”
However, the company handily beat estimates for earnings per share, generating EPS of $11.9 (consensus: $10.6).
But the company was forced to set aside $1.7bn to cover a fine from the European Union over its advertising practices, which cut its EPS to $9.5 (consensus: $9.91).
After tax profits hit $8.3bn or $6.7bn taking that same fine into account. Operating margins meanwhile came in at 23% or 18% after the fine.
In a conference call with investors, executives laid part of the blame for weaker-than-expected profits on headwinds in the currency market, but said that they were undeterred, promising to continue to spend freely.
“Based on the continued strengthening of the U.S. dollar relative to key currencies, we expect to continue to see headwinds to our revenues and operating income again in the second quarter,” Chief Financial Officer Ruth Porat said in Monday’s conference call.
George Salmon, equity analyst at Hargreaves Lansdown said on Monday: "Another EU fine won’t have washed well with investors, but in reality it’s not the cheque on its way to Brussels that’s causing the shares to drop. Instead, it’s a nasty combination of growth in traffic to Google ads slowing and lower revenue per click from those ads that’s upset the market. The results come after Amazon also reported weaker trends in its advertising business just last week. Longer-term, however, there’s still plenty of reasons to be positive on the stock."
He added: "Alphabet is earning high margins and churning off cash. The group still generated $12bn in operating cash flow this quarter alone. That works out at around $133m a day.
"The billions pouring into Alphabet are more than enough to take care of the group’s investment requirements for the core business, and fund expansion into a range of other areas, including cloud computing, healthcare and self-driving cars. The latest venture is into video gaming, where Alphabet is hopeful of harnessing its huge cloud computing platform and the 1 billion-plus daily YouTube users to create a new gaming megahub.
"The prospect of huge cash flow and a multitude of potentially lucrative other interests is still an attractive one for investors, although with well over $100bn hoarded on the balance sheet the question remains as to what Alphabet is going to do with all the cash. Still, as problems go, that’s not a bad one.”
As of 1211 BST, shares of Alphabet were being called to start the session 7.50% lower at $1,191.0.