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OK Google, Sell Alphabet

Alphabet's stock drops

Image source: nakaridore - Shutterstock

What's going on?

On Monday, Alphabet joined the other tech giants in reporting a better-than-expected first-quarter profit – but lower-than-expected revenue may have had something to do with its stock falling 8%.

What does this mean?

Although 92% of web searches happen on Alphabet’s Google, over half of people shopping for a product now start at Amazon – boosting its advertising business. Alphabet’s own ad business is still the jewel in its crown – but while growth there helped overall revenue increase by 17%, that was less than investors had been expecting. With Facebook raking in the ad dollars, maybe Alphabet shouldn’t have closed Google+ after all… (tweet this)

Rising costs remain an issue for all the big tech firms. At Alphabet, major costs include paying others to dish out its ads on mobile, as well as maintaining the servers (although maybe not Intel’s) that host its cloud computing business. Compared to last quarter, Alphabet made some progress in reining costs in, helping its profit to beat estimates despite margins falling.

Why should I care?

For markets: Analysts and investors are split on Alphabet.

Tech stocks have risen some 27% this year, leading US stocks’ charge to new record highs on Monday. According to TipRanks, most investment bank analysts recommend buying Alphabet’s stock – likely thanks to its still-respectable profit margin and strong cash reserves. Investor sentiment, however, is low – and fast-moving hedge funds have been selling off Alphabet’s stock recently. Other investors also appeared to reject analysts’ cheerfulness on Monday.

The bigger picture: Looking right at the future.

The advertising industry’s currently Googling “existential crisis”. Companies are forgoing traditional agencies in favor of more “authentic” direct outreach to customers via social media – though even that’s now losing its shine. Platforms like Twitter, Facebook, and Snapchat are betting big on video – and Alphabet doesn’t plan on being left behind. Its new video game streaming service could see YouTube become the esports hub, putting more eyes – and clicks – on Alphabet’s ads.

Originally posted as part of the Finimize daily email.

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