ii view: Profit takers hammer Google shares

by Keith Bowman from interactive investor |

Sales disappoint, but a better comparison with rivals can now be made. Amazon, Microsoft or Alphabet?

Fourth-quarter results to 31 December 2019

  • Revenue up 17% to $46.1 billion
  • Net income up 19% to $10.7 billion
  • Earnings per share up 20% to $15.35

Chief executive Sundar Pichai said:

“Our investments in deep computer science, including artificial intelligence, ambient computing and cloud computing, provide a strong base for continued growth and new opportunities across Alphabet. I’m really pleased with our continued progress in Search and in building two of our newer growth areas — YouTube, already at $15 billion in annual ad revenue, and Cloud, which is now on a $10 billion revenue run rate."

ii round-up:

Online advertising mammoth and owner of YouTube, Alphabet (NASDAQ:GOOGL), posted sales or revenue below analyst forecasts in these fourth-quarter results.

Revenue growth of 17% to just over $46 billion fell shy of estimates nearer to $47 billion and was down on both last year’s final quarter gain of 22% and the prior third quarter at 20%.

Alphabet shares fell by around 4% in after-hours US market trading.

In a first for the company, it also detailed the revenue performances from its various component companies such as YouTube and its cloud data business. 

Sales for cloud rose by 53% to $2.6 billion, better than growth of 34% seen at rival Amazon (NASDAQ:AMZN) but below the 62% posted by Microsoft's (NASDAQ:MSFT) Azure cloud division. 

Revenue for its biggest segment, advertising, grew by 17%. For YouTube, now facing increased competition from new internet streaming services at both The Walt Disney Co (NYSE:DIS) and Apple Inc (NASDAQ:AAPL), advertising revenue expanded by 31% to $4.72 billion. 

Aided by a share buyback programme, earnings per share far exceeded forecasts, although fourth-quarter operating margin retreated to 20% compared with 21% in the final quarter of 2018.

Founders Larry Page and Sergey Brin recently stepped down from their roles as chief executive and president. Engineer-turned-manager, Sundar Pichai, now leads the company. 

ii view:

If Apple is smartphones and Microsoft operating and business software, Alphabet Google is synonymous with the internet and the ability to search its now endless data. 

Companies’ ability to advertise and display their services using its technology has underwritten phenomenal growth. However, Alphabet is far more than advertising. It is investing in cloud centres to host ever increasing amounts of data, its Google Nest devices compete with Amazon’s Alexa, while its self-drive Waymo vehicle business could one day compete with Ford Motor (NYSE:F) and Tesla (NASDAQ:TSLA).

For investors, slowing revenue growth and a change of leadership generate some caution. But a breakout of its various revenue streams adds transparency, its recently made bolt-on acquisitions for its cloud business, while a forward price/earnings (PE) ratio below the three-year average provides encouragement.

Positives

  • Alphabet and Facebook (NASDAQ:FB) dominate the digital advertising market
  • Management believes Artificial Intelligence offers enormous opportunities ahead
  • Year end cash held of $133 billion

Negatives

  • Cloud business trails both Microsoft’s & Amazon’s in size
  • Technology giants suffering increased global government scrutiny
  • No current dividend payment

The average rating of stock market analysts:

Strong buy

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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