Based on the market reaction after Alphabet (Nasdaq: GOOG) reported its first quarterly results on Monday, April 23, 2018, investors seem to have doubts about the company.
Despite strong earnings growth since the fourth quarter of 2009 and the announcement of increased spending to reach competitors in hardware and cloud storage, Google’s stock is still under heavy pressure. In fact, they fell more than 4% the day after the release of Q1 figures.
After years of steady growth, it is surprising that as recent results show, opposing forces, both bearish and bullish, are reducing the price of Google stock. Here we have a justification for each case:
A case down
Pessimists believe that the profitability of Google’s large spend on cloud and hardware is uncertain. Even if the company gets it right, it will take years to get the full effect. At the same time, it will suffer considerable pressure on margins and open up the possibility that its measures will lead to poor results.
The world’s largest digital advertising retailer announced this week that it invested $ 7.7 billion in investments, three times more than last year. Analysts expect $ 3.5 billion of investment in all parts of the alphabet in the first quarter.
The increase follows after Google has strengthened its cloud computing department to compete with Amazon (Nasdaq: AMZN) to diversify its revenue base beyond digital advertising. But that’s not a struggle for Google.
CFO Ruth Borat told investors during the conference call that this would be the company’s future direction. “You can not point to an event in terms of the investment we are doing,” he said. “We build to support the growth we see.”
According to Porat, the new funds will be used primarily to enhance the company’s data center capabilities and to develop new underwater cables, processors, network devices and artificial intelligence from Google or from automated learning companies.
On the contrary, cops take this increase in spending as a positive thing. In his view, Google should spend money to generate money and lay the foundations for sustainable growth. After years of neglecting these markets for their advertising efforts, it’s time for Google to compete with Amazon and Apple (NASDAQ: AAPL), where they are truly blamed for their own business.
Until recently, nearly 98% of Google’s revenue came from online advertising. Now the coaches wake up to find that diversity is needed as privacy concerns and new social networking rules can affect their popularity with advertisers.
In Europe, for example, next month the general Data Protection Regulation of the European Union will come into force to regulate the handling of personal data and traffic, with the aim to control these data for domestic or EU citizens. In short, it changes the way user data is collected and directs ads from Internet companies.
I see the increase in Google spend as something positive in the long run, and I do not think that should be a reason to get the company involved in this great company. Investors should have confidence in the ability of management to manage results.
The good news is that this increase in spending is occurring at a time when Alphabet’s profits are growing faster. In the first quarter, Alphabet sales increased 23.5% to its highest level since 2014.
The usual drivers for Google’s mobile search growth are still undisputed, while YouTube and auto-advertising are growing strongly. Investors should keep the shares of Alphabet.
Instead of seeing additional spending as negative, investors should be reassured that management is taking advantage of this momentum and investing in areas such as cloud computing that have the potential for future growth. This is undoubtedly the right path that Google must take, and will undoubtedly increase corporate value.