Alphabet Beats Earnings, But Stock Flatlines After Hours

Alphabet reported earnings on Monday afternoon kicking off the most important week for this earnings season. Earnings per share were $9.93 which beat the consensus for $9.28. Revenue was $31.15 billion which beat estimates for $30.29 billion. Operating income was $7 billion which beat estimates for $6.6 billion. Even with these great headline numbers, the stock didn’t react much after hours as it ended the session down less than 1%. This is consistent with what we’ve seen thus far in earnings season as most firms beat estimates, but their stocks are stagnant. At this pace, I wouldn’t be surprised if earnings results beat estimates by more than normal while the stock market remains in place.

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The charts above give an overview of the quarter. Ad revenue as a percentage of total revenues is declining as Alphabet grows from just being Google and YouTube. It’s probably a good thing to diversify since regulatory bodies and privacy advocates are gunning for the way big tech firms’ gather information on users. To be clear, Alphabet will be reliant on ads for the foreseeable future, but improvements in other categories signals some of the other bets it makes are paying off.

Other Bets Grow Quickly

The veil around the other bets was revealed this quarter because of changes to accounting rules. Alphabet had a $3.03 billion gain on equity investments which includes Uber. The investment in Uber was $258 million at a $3.8 billion valuation; Uber is now worth above $60 billion. Other revenues were $4.3 billion which is up from $3.2 billion. The other bets include hardware sales and the cloud division. The smart home division, Nest, had $726 million in revenues last year and lost $621 million. Alphabet lets these other bets run losses for years in the hopes they innovate and create profits in the future. Alphabet wants to be the company investing in the next $100 billion markets in tech. With such a high moat in search, the company has plenty of cash to invest. Sometimes these investments can help the core business or collaborate with each other. One nugget from the conference call is Waymo, Alphabet’s self-driving car division, has had its cars drive 5 million total miles.

Capex Explosion At Google

As you can see in the chart above, the firm accelerated its hiring growth from 11% to 15%. Alphabet not only spent money on its other bets, the firm also spent $7.669 billion in Q1 on capex in the Google division. That’s a huge spike from Q1 of last year where Google spent $3.805 billion in capex. The boost was so huge that analysts only expected $3.5 billion in total capex for the entire firm. There was a boost in data center costs, a $2.4 billion purchase of Chelsea Market, an increase in content acquisition costs from YouTube, and an increase in hardware costs.

Alphabet’s forward PE of 25.82 shows investors are willing to pay up for Alphabet’s other investments. Alphabet is considered one of the most innovative companies in the world, giving it a long leash on what it can spend money on. This wasn’t always the case as 6 years ago, there was skepticism about what the firm was investing in. There could be a change in the way Alphabet is valued as a result of this new accounting rule because more information is gleaned about its other bets. Instead of having a veil hide them until some grow large and earn profits, we see them in their infancy when they lose gobs of money. To be clear, I’m not saying that you should lose faith in Alphabet; instead I’m saying it’s fair to question the firm. The chart below shows Alphabet has a great track record of growing the topline as growth has accelerated since 2013.

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A Big Week For Earning

Alphabet’s earnings are in the rearview mirror, but the earnings party is just getting started. As you can see in the chart below, Thursday is the biggest week for earnings in terms of the market caps of firms reporting as a percentage of the S&P 500. The biggest firm reporting on Thursday is Amazon which I consider to be a good bellwether name to determine the health of the consumer and the trends in technology. The other big tech firm reporting Thursday is Microsoft.

Facebook is reporting Wednesday. It’s the most interesting of the FAANG names because it has come under heavy scrutiny this year as privacy scandals have rocked what was a smooth sailing ship ever since the volatility right after the IPO. The key worry is a lot of advertisers left the firm because of the scandal. I think it’s tough for a firm to leave Facebook because it owns such important real estate on the internet. It’s one of two companies (Alphabet) which dominate the advertising space online. Because of its the great targeting capabilities, it’s hard to leave Facebook without seeing a drop off in engagement and sales.

As I’ve mentioned in a previous article, the earnings results have been great so far. As you can see, 80% of S&P 500 firms have beaten earnings estimates which would be by far the highest beat rate since at least 1999 if the quarter were to end today. It’s unlikely that the average beat rate will stay that high for the duration of the quarter. If stocks have been flat during great earnings reports, I wonder what would be happening if the pace of beats weakened. Either investors are ignoring earnings reports or they have very high standards.

Conclusion

This is the biggest week for earnings as 4 of the FAAMG names are reporting. Facebook will be the most interesting as it has come under fire. On Friday, we will get the advanced Q1 GDP report. Next week is Apple’s earnings, the PCE inflation report, and the monthly jobs report, meaning this is a big two weeks for earnings and data.