What's going on?
Alphabet Inc., the parent company of Google, reported first-quarter earnings on Monday that beat market expectations for both revenue and profit – but it also said that the cost of running its all-important advertising business is still growing…
What does this mean?
The vast majority of Alphabet’s revenue comes from advertising on Google – a whopping $27 billion last quarter [tweet this]. But even though more and more people are interacting with Google’s ads, the prices it charges for them have fallen in 2018 as more of those interactions take place on mobile devices rather than desktop (where ads cost more).
On top of that, Alphabet tripled its spending on property and equipment (think: cloud data centers) versus a year ago to $7.3 billion. Overall, in fact, the costs and expenses incurred by Alphabet grew faster than its revenue last quarter.
Why should I care?
For markets: A greater move to mobile ads is hurting some of Alphabet’s margins.
Investors were watching carefully for any changes in how much of Alphabet’s ad revenue is shared with third parties. If you click an ad on Google while using Apple’s Safari browser, for example, Alphabet ends up paying Apple a cut of the revenue. Thanks to the growing prevalence of mobile ads, Alphabet ended up shelling out a bigger slice of its total ad revenues on these costs versus last year, and it expects to generally earn even less per ad as advertising increasingly shifts to mobile (but perhaps earn more overall as people interact more often with those ads).
The bigger picture: Some of the FAANG have toothache these days…
Having hit all-time highs in early January, Alphabet’s stock slumped 10% following a mixed fourth-quarter report that also showed a slide in the profitability of its advertising business, before rebounding somewhat recently. Another FAANG stock that’s been struggling lately is Facebook, and investors will be watching on Wednesday to see whether enough users #DeletedFacebook to dent the company’s own ad revenues…