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Alpha Beta

A_Bad

Image source: Chones, Phive - Shutterstock

What's going on?

On Thursday, Alphabet – Google’s parent company – reported third-quarter results that were more “A+” than “zzz”… but its stock fell by 3%.

What does this mean?

Investors are used to Alphabet exceeding expectations: this time around, profit was 25% higher than predicted, while sales were marginally below forecasts.


Google still accounts for the lion’s share of Alphabet’s earnings. The search engine gets paid every time people see the ads it hosts, but it has to share that revenue with the likes of Apple if the ad is viewed a Safari web browser, for example. The share of Google sales paid out to third parties failed to fall last quarter – likely a disappointment to investors who’re also seeing Alphabet spend more on data centers (for cloud computing services) and YouTube content, particularly music.

Why should I care?

For markets: No rest for the wicked.

When markets wobble, tech stocks tend to fall first and fastest – as seen recently. Investors get colder on tech’s promise of high sales growth and profit to come, instead favoring shares in more “predictable” companies, whose prices, relative to expected profits, are often cheaper. Stubbornly high costs may have encouraged investors to sell off Alphabet’s shares, in contrast to Twitter’s: its stock rose 17% on Thursday, partly thanks to a better-than-expected third quarter where ad sales rose even as active users on the platform fell.



The bigger picture: Crowded advertising space.

A rising number of shoppers starting their search on Amazon rather than Google (as they might’ve done previously) has some investors worried that the big A’s encroaching on the other big A’s advertising business. Still, it’s got a way to go: Amazon’s ad space generates some $8 billion of annual revenue; with Google, that’s over $100 billion. But adversity breeds invention: while Google appeals a European fine related to pre-loading its own apps on Android phones, it’s also busy planning to charge phone makers license fees for its apps instead, potentially unboxing a new source of revenue.

Originally posted as part of the Finimize daily email.

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