Google revenue

Google’s shortfall wipes out $ 70 billion from Alphabet’s market value

Wall Street slashed Google on Tuesday, wiping out $ 70 billion from its parent company’s stock market value after the internet giant struggled to explain a shortfall in its last quarterly revenue that has left analysts frustrated and worried about a possible erosion of its advertising core. Business.

Google revealed late the day before that it had missed a beat after a surge in revenue growth that took shares of parent company Alphabet to record highs.

He announced revenue growth of 17% in the first three months of the year – a huge number for a company with quarterly revenues of $ 36.3 billion, but still about $ 1 billion less than what most analysts had expected. Its shares closed 7.5%, its worst performance in nearly seven years.

Alphabet blamed the deficit on a number of factors, including the strength of the U.S. dollar, a difficult comparison to a strong quarter last year, and a timing consideration that left it with fewer improvements to its advertising services in the past. in recent months, which could have increased his income. .

However, a lack of details has left many on Wall Street struggling to understand whether Google’s advertising business could start to suffer from more serious issues, such as weakening demand from advertisers or increased competition from Amazon. which has made a concerted push into the research market. .

“It’s really hard to know for sure, there are so many moving parts,” said Youssef Squali, analyst at SunTrust Robinson Humphrey. In a call with analysts at the company, Google executives were not clear on how the timing of changes to its services for advertisers factored into the downturn, he said. .

“They were very, very opaque about what the changes are and the impact of the changes,” he said. Of Alphabet’s revenue growth, he said: “This is showing potential signs of strain.”

In a note to clients, Brent Thill, analyst at Jefferies, said that “the company’s lack of transparency is troubling investors,” and that without more information, many “might be resigned to the idea that [Alphabet] is a story of weaker, potentially losing growth.

Baird analyst Colin Sebastian added that the lack of details would be a “new surplus” on the company’s shares at a time when investors were already worried about increasing competition and regulation.

A year ago, a 25% increase in revenue coincided with an acceleration in the growth of large consumer internet companies to set the stage for a sharp rise in stock prices in the industry.

The rising US dollar has been a major factor in the slowdown since then, said Ruth Porat, chief financial officer; currency movements had added 3 percentage points to growth in the first three months of 2018, but erased 2 percentage points from growth this year.

She also warned that “the timing of product changes can impact year-over-year growth rates” – a standard warning from Google executives, but sharper this time around.

Changes to YouTube advertising have contributed to a sharp increase in the number of times people clicked on Google ads in the first three months of last year, jumping 59%. In contrast, in the absence of further changes with an equally powerful effect, the click-through growth rate fell to 39% in the last quarter.

Sundar Pichai, chief executive, said the company had not managed the schedule of new services around its quarterly earnings schedule. “We have a long-term vision of where we want to go. You’re going to have quarter-to-quarter variations from time to time, ”he said.

While its earnings performance disappointed investors, Alphabet generated higher profits than analysts expected in the first quarter – the opposite of what investors expect from the company, which has invested heavily for growth. during the last quarters.

Alphabet’s profits for the period fell 29%, to $ 9.50 a share, as it took a charge of $ 1.7 billion to cover the cost of an EU fine in March, on what regulators have claimed to be anti-competitive restrictions on advertisers. *

Without it, he would have reported earnings per share of $ 11.90, more than the $ 10.58 analysts were expecting. The numbers benefited from lower traffic acquisition costs at Google, or money the company pays to partners who serve its ads, as well as lower-than-expected marketing spend.

Alphabet’s overall capital spending also fell 40% to $ 4.5 billion, after hitting $ 25.1 billion for all of last year.

However, Ms Porat indicated that Google has no plans to abandon its heavy investments this year. Capital spending is expected to rise from the heady level of 2018, but at a much slower pace. The company has allocated $ 13 billion in the United States alone this year to invest in new data centers and expand its offices.

Additional reporting by Matthew Rocco in New York

* This article has been modified from the original publication to correct the after-tax impact figure on profits