Breaking News

Post-Earnings, Google Has Momentum. Why Some Investors Don't Agree

By (Haris Anwer/ MarketsApr 26, 2018 02:01
Post-Earnings, Google Has Momentum. Why Some Investors Don't Agree
By (Haris Anwer/   |  Apr 26, 2018 02:01
Saved. See Saved Items.
This article has already been saved in your Saved Items

Judging by the market reaction after Google’s parent company, Alphabet (NASDAQ:GOOG), announced its first-quarter earnings this past Monday, April 23, 2018, it appears investors are uncertain about the stock.

GOOG Daily
GOOG Daily

Despite reporting its strongest earnings growth since the fourth quarter of 2009 and announcing it was increasing spending to catch up to its cloud and consumer-device business rivals, Google’s stock continues to remain under pressure. In fact, it sank more than 4% the day after it released its Q1 numbers.

GOOG Weekly 2015-2018
GOOG Weekly 2015-2018

After years of steady gains, surprisingly, since its most recent earnings release there are now two opposing forces—bears and bulls—pulling at Google's share price. Here's the rationale for each case:

Bearish Case

Bears think that the pay-off from Google’s heavy spending on its cloud and device segments is uncertain. Even if the company succeeds at making a meaningful dent, it will still take years to see the impact on its bottom line. In the meantime, the company will face pressure on its margins, opening the door for its stock to underperform.

The world’s largest digital ad seller disclosed this week that its spent $7.7 billion on capital expenditures—triple what it spent during the same period a year ago. Analysts were expecting just $3.5 billion in capital expenditures for the first quarter for all of Alphabet's divisions.

This ramp-up in spending comes as Google strengthens its cloud computing business to compete with Amazon (NASDAQ:AMZN), in order to diversify its revenue base beyond digital advertising. But this isn’t a one-time battle for Google.

Chief Financial Officer Ruth Porat told investors during the conference call that this is going to be the trend for the company going forward. "I wouldn’t suggest a one-off in terms of the investment we’re making," she said. "We’re really building out to support the growth that we’re seeing."

According to Porat, the new funding will mainly go to strengthen the capabilities of the company's data centers, and toward laying new undersea cables, processors, networking equipment and Google’s artificial intelligence or machine learning business.

Bullish Case

Bulls, on the other hand, take this spike in spending as a positive development. In their view, Google needs to spend money in order to make money and to lay the groundwork for sustainable growth. After neglecting these markets for years in favor of its main ad businesses, now is the time for Google to challenge Amazon and Apple (NASDAQ:AAPL) where it counts...on their home turf.

Until very recently, about 98% of Google's revenue came from its online ad business. Management has now woken up to the fact that it needs to diversify, when concerns about user privacy and new regulations targeting social media giants may hurt its ad business. In Europe, for example, the EU's General Data Protection Regulation kicks in next month. It codifies how personal data and the movement of that data should be handled, with the primary goal of giving control of that data to the individual European Union resident or citizen. In short, it changes how internet companies collect user data and the ways in which they can target ads.

I see Google’s increased spending as a positive development in the long-run, and I don’t think this should be a reason to turn bearish on this great company. Investors need to have some faith in management’s ability to drive results.

The good news is that that this increased spending arrives at a time when Alphabet’s revenue is growing at a more rapid pace. In the first quarter, Alphabet's net sales jumped 23.5%, the fastest since 2014.

The Bottom Line

Google’s traditional growth drivers via mobile search remain unchallenged while YouTube and programmatic advertising show robust growth. Investors should hold on to Alphabet stock.

Rather than seeing the additional outlay as a negative, investors should be reassured by the fact that management is taking advantage of this momentum and investing in areas, such as cloud computing, that have the potential to drive future growth. This is absolutely the right path for Google to take and will undoubtedly increase shareholder value.

Post-Earnings, Google Has Momentum. Why Some Investors Don't Agree

Related Articles

Post-Earnings, Google Has Momentum. Why Some Investors Don't Agree

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email