Alphabet Stock Slide No Cause for Worry, Analysts Say

 
 
By Jaikumar Vijayan  |  Posted 2016-04-22 Print this article Print
 
 
 
 
 
 
 
Alphabet

Concerns over deepening losses in Alphabet's moonshot projects take some shine off an otherwise strong first-quarter performance, especially by Google.

Google parent company Alphabet's stock dropped more than 5 percent in trading on Friday following the company's release of its first-quarter results last night that showed both its revenues and earnings coming slightly under Wall Street estimates.

But technology and financial analysts generally dismissed the slide as a case of temporary jitters and said there's nothing in the results to suggest any problems for Google.

"All signs are that Google's business is doing fine and in capable hands," said Tom Austin, an analyst at Gartner, in comments to eWEEK.

Analyst Colin Gillis of BGC Partners echoed those sentiments in comments to the New York Times. "There's nothing wrong with this company," Gillis told the Times. The stock slide appears to be a response to the fact that Google spent slightly more than expected in the last quarter while bringing in slightly less, he said. "But it was a fine quarter."

For the quarter ended March 31, Alphabet reported net income of $4.2 billion on revenues $20.26 billion. The numbers represented a 17 percent increase in revenues and a nearly 20 percent jump in net profits over the same period last year.

Still, they fell short of consensus estimates of $20.37 billion in revenues and earnings per share of $7.97 rather than the $7.50 EPS that Alphabet ended up reporting.

For the second time since it started reporting revenues as Alphabet, almost all of the company's revenues and all of its profits came from Google's core ad and search businesses.

Google's ad business, which includes revenues from Google Websites and affiliate Websites—generated over $18 billion in the first quarter. Other Google products, such as the company's Google Play store, Chromecast, Google Apps, Google Cloud and Android, generated an additional $2.1 billion in revenues.

Together, these two revenue streams, which under Alphabet are considered as the Google segment, contributed nearly $20.1 billion of the company's revenues last quarter, while accounting for all of its profits.

Meanwhile, the company's myriad other projects including its many moonshot ventures, which are now classified as "other bets" under Alphabet, collectively generated $166 million in revenues.

That number was more than double the $80 million in revenues in the same quarter last year. But losses from these other bets jumped steeply as well from $633 million to $802 million, triggering the jittery stock slide following the earnings release.

The concerns are misplaced, however, Gartner's Austin said. "I view these other bets investments to be technology and business research," Austin said. "They're not intended to generate money. When they generate revenue, they'll leave the other bets category."

Alphabet's ownership and governance model and the attitudes of its senior executives suggest the company will continue to invest in these other bets and nurture them to the extent possible. Where the bets do not pay off, expect to see Alphabet cutting them from its portfolio, he said.

"Google created the Alphabet model so outside investors could see the difference between [its] core business and deep research projects," Austin added. "[They are] of the opinion that research efforts like these can't be judged on a quarterly revenue and profit and loss basis. That's a very rational approach."

Charles King, an analyst with Pund-IT, characterized the stock slide as a minor blip. "While several analysts lowered their dollar expectations, none changed their recommendations for Alphabet," he said.

Alphabet's willingness to classify its speculative investments as "moonshots" has gone a long way in clarifying the long-term nature and risk associated with these ventures, King said.

"But it also demonstrates that the company is keeping an eye firmly fixed ahead on areas that may or will affect its future efforts."

Recent news like reports of its plans to get rid of robotics venture Boston Dynamics show that Alphabet's patience has its limits, he said. "It won't surprise me if the company abandons or reduces investments in other areas if their likelihood of commercial success wanes."

 
 
 
 
 
 
 
 
 
 
 
 
 

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