Google-parent company Alphabet disappointed Wall Street with first-quarter revenue misses on Monday, as it grapples with a hefty European Commission fine.
Had it not been for the $1.7 billion penalty, which was levied on the Internet giant last month for anticompetitive practices in online advertising, Alphabet would have sailed over expectations of $10.60 per share, as outlined by a Refinitiv analyst survey. Its earnings per share would have come to $11.90. But instead, with the EU fine, Alphabet’s EPS rang in at $9.50, while revenue clocked in at $29.48 billion, coming in under the $30.04 billion expected.
Growth of paid clicks on Google sites showed a steep drop-off, compared to the previous two quarters: Over the first three months of 2019, paid clicks grew 39 percent, year-over-year. The third and fourth quarters of 2018 gains clocked in at 62 and 66 percent.
Not all the news was bad: Traffic acquisition costs amounted to $6.86 billion, or 22 percent of advertising revenue, which was shy of FactSet’s expected $7.26 billion.
Last quarter, Alphabet shares stumbled when it reported more capital expenditures and a lower operating margin than expected. But overall, investor optimism had sent the stock up 24 percent for the year.
On the heels of this latest report, the stock plunged 7 percent in after-hours trading.
The numbers tell a sobering story: Generally, if companies perform well, investors may not care about government fines. But Google is not earning as much from paid clicks, and since it’s not expanding traffic fast enough to make up for the declines in its ad business, the company must look to other areas to fill the gap.
Those areas include devices and Google’s cloud operation, listed as “other revenues,” which recorded $5.45 billion. There’s clearly momentum behind the latter. In a bid to compete with top-line rivals such as Amazon Web Services and Microsoft Azure, the tech company chose Oracle veteran Thomas Kurian in November to steer its cloud group, while increasingly courting retail and other sectors in recent months.
The company’s hardware business struggled, as the mobile tech space redefines itself in the era of premium smartphones and laptop-level pricing. The whole sector is learning how to deal with this landscape and what effective promotions should look like in the face of it.
The company’s “other bets” diversify its interests further, covering self-driving start-up Waymo and the health-oriented Verily. This revenue is a small slice of the pie for the tech giant, but it’s growing. “Other bets” brought in $170 million in revenue, an uptick from the $150 million reported last year, but less than expectations of $172 million. It also reported an operating loss of $868 million.
There could be better news ahead, though, as Google’s parent company stands to make billions over its Uber and Lyft investments. They are two of the most buzzworthy initial public offerings in recent tech history, and Alphabet owns roughly a 5 percent stake in each.
Alphabet’s focus on the automotive space is nothing new, with pursuits in navigation and Android Auto to autonomous driving and ride-sharing. But, as competitors such as Amazon deepen their interests in the car space — which will likely include how to eventually bring more advertising and commerce into the vehicle — Google’s stake behind the wheel could grow.
But for now, the company must navigate an increasingly complex landscape. Its challenges have grown over the past year, and not just externally. Along with pressure from rivals like Amazon and Facebook, the company has faced internal forces, like the worker walkout in November over accusations of sexual misconduct, treatment of contractors and other matters. Meanwhile, it’s also dealing with public and congressional scrutiny over its privacy practices.
Naturally, one of the themes during the Monday call with investors dealt with privacy. Like Facebook, Google took on the subject, though in a more measured, if somewhat vague, way.
“User expectations around privacy are constantly evolving and we stretch ourselves to meet them,” said Google chief executive officer Sundar Pichai. “We will have more changes over the course of the year.”
According to Pichai, the company will invest more in YouTube algorithms, following reports that the platform disseminated misinformation, hate speech and other problematic content. And, he pledged, the company will continue addressing privacy concerns from users.
The company will have to. Privacy concerns will likely only grow more important with time, as Google pushes further into retail and expands its store of user data. Expect privacy to remain a key theme at its Google I/O developer conference next week.