Whatās Going On Here?Google-parent Alphabet announced weaker-than-expected fourth-quarter earnings on Monday, and ā like a grad student dishing up cold Alphabetti Spaghetti ā the tech giant looked at the disappointing results and asked itself, āSurely I can do better?ā What Does This Mean?Alphabetās overall revenue, made up mostly of Googleās advertising business, fell just short of investorsā forecasts. But the real issue was the companyās costs ā including those it pays the likes of Apple to distribute its mobile ads ā which came in higher than expected. They meant Alphabetās quarterly profit from its business activities (its āoperating profitā) missed targets too.
Still, at least Alphabet revealed exactly how much Google makes from YouTube ads and its cloud computing segment for the first time. Investors might welcome that transparency: Googleās reportedly threatened to quit the cloud business if itās not the second-biggest there is by 2023 (tweet this). Why Should I Care?For markets: Investors look to the skies.
Googleās operating profit margin has fallen every year since 2017, but analysts think growth in its highly-profitable cloud business could turn that around this year. In fact, 90% of investment bank analysts currently rate Alphabetās stock a buy, and even Mondayās 3% share price drop is unlikely to change that. Its share price, then, probably already takes their high expectations into account. Trouble is, if Alphabet wants to keep boosting its shares, itāll probably need to increase those margins by even more than predicted.
The bigger picture: The next $100 billion.
Investors taking a longer-term view might look to Alphabetās other ventures as a source of future profit. Take Waymo: analysts reckon that between the growing ride-hailing market and future sales of self-driving cars, the Alphabet-backed autonomous vehicle company could be worth as much as $135 billion. But very little, if any, of that potential value is currently reflected in Alphabetās current share price. And if new investors decide thatās an unfair oversight and start buying up Alphabetās shares, current investors could be in for a windfall. | 