What's going on?
Alphabet – the parent of Google – spelled out a better-than-expected fourth-quarter profit on Monday. But, like last quarter, its stock fell – by 3%.
What does this mean?
Google makes up the lion’s share of Alphabet’s sales with its advertising business – continued growth there helped revenue to beat expectations. But investors had an eye on Alphabet’s costs: when its ads are viewed on mobile phones, Google has to pay a share of its revenue to whichever third party helped serve them (e.g. Apple’s Safari browser). Alongside that, Alphabet revealed higher “capital spending” on data centers and machines to better compete with the likes of Amazon’s cloud computing business. Although Alphabet’s profit per share was higher than expected, the company’s costs were too (tweet this).
Why should I care?
For markets: Alphabet’s down – and tech fell out of favor.
Despite global stocks’ rise last month leading to their best January since 1987, investors were still battening down the hatches. Analysis by State Street Global Advisors showed that investors shied away from companies expected to generate high earnings growth – like tech companies – in January. Instead, they bought stocks of “defensive” companies like utilities and telecoms, probably attracted to their long-term stability – and good visibility on likely dividends. Alphabet’s shares rose in January – but Monday’s fall could mean it joins other unloved high-growth stocks.
The bigger picture: Alphabet’s still in the European doghouse.
Google may have narrowly skirted an app ban from Apple last week, but it’s still finding it tough to keep friends in Europe. After last year’s $5 billion fine from the European Union for unfairly bundling its own apps onto Android phones, once-bitten Google wasn’t twice shy – the company’s failure to comply with French data privacy laws recently cost it $58 million in fines. While a drop in the ocean compared to Alphabet’s $40 billion of sales last quarter alone, it’s a reminder that Europe’s serious about its crackdown on Big Tech.