Google shortfall wipes $70bn off Alphabet market value

Wall Street took an axe to Google on Tuesday, wiping $70bn from the stock market value of its parent company after the internet giant struggled to explain a shortfall in its latest quarterly revenues that left analysts frustrated and anxious about a possible erosion in its core advertising business.

Google disclosed late the day before that it had missed a beat after a revenue growth surge that had carried shares of parent Alphabet to record highs.

It reported revenue growth of 17 per cent in the first three months of the year — a huge figure for a company whose quarterly revenue has now hit $36.3bn but still about $1bn less than most analysts had expected. Its shares fell 8 per cent on Tuesday morning.

Alphabet blamed the shortfall on a number of factors, including the strength of the US dollar, a tough comparison with a strong quarter last year and a timing consideration that left it with fewer enhancements to its advertising services in recent months that might have pushed revenue higher.

However, a lack of detail left many on Wall Street struggling to understand whether Google’s ads business may be starting to suffer from more serious issues, such as weakening demand from advertisers or heightened competition from Amazon, which has made a concerted push into the search market.

“It’s really hard to know for sure, there are so many moving parts,” said Youssef Squali, an analyst at SunTrust Robinson Humphrey. Google executives had been unclear on a call with company analysts exactly how the timing of changes to its services for advertisers had factored into the slowdown, he said. 

“They were very, very opaque about what the changes are, and the impact of the changes,” he said. Of Alphabet’s revenue growth, he said: “It is showing potential signs of strain.”

In a note to clients, Brent Thill, an analyst at Jefferies, said the company’s “lack of transparency was troubling to investors”, and that without more information, many “may be resigned to the view that [Alphabet] is a lower growth story, potentially losing share.”

Baird analyst Colin Sebastian added that the shortage of detail would be a “new overhang” on the company’s shares at a time when investors were already getting worried about rising competition and regulation.

A year ago, a 25 per cent jump in revenues coincided with an acceleration of growth at the big consumer internet companies to set the stage for a strong share price rally in the sector.

The rise in the US dollar was a significant factor in the slowdown since then, said Ruth Porat, chief financial officer; currency fluctuations had added 3 percentage points to growth in the first three months of 2018 but wiped 2 points from growth this year. 

She also warned that “the timing of product changes can impact year-on-year growth rates” — a standard caution from Google executives, but a more pointed one this time round. 

Changes to advertising on YouTube contributed to a big jump in the number of times internet users clicked on Google’s adverts in the first three months of last year, leaping by 59 per cent. By contrast, with no new changes with an equally powerful effect, the growth rate in clicks fell to 39 per cent in the latest quarter.

Sundar Pichai, chief executive, said the company did not manage the timing of new services around its quarterly earnings calendar. “We have a long-term view of where we want to go. You are going to have quarter-to-quarter variations once in a while,” he said.

While its revenue performance disappointed investors, Alphabet turned in stronger earnings than analysts had forecast in the first quarter — the opposite of what investors have come to expect from the company, which has been investing heavily for growth in recent quarters.

Alphabet’s earnings for the period fell 29 per cent, to $9.50 a share, as it took a $1.7bn charge to cover the cost of a fine by the EU in March, over what regulators claimed were anti-competitive restrictions it put on advertisers.*

Without this, it would have reported earnings per share of $11.90, or more than the $10.58 that analysts had been expecting. The figures benefited from lower traffic acquisition costs at Google, or the money the company pays out to partners that carry its ads, as well as lower than expected marketing spending.

Alphabet’s overall capital spending also fell 40 per cent, to $4.5bn, after hitting $25.1bn for all of last year.

However, Ms Porat indicated that Google was not planning to let up on its heavy investments this year. Capital spending was expected to grow from the heady 2018 level, though at a much slower pace. The company has earmarked $13bn alone in the US this year for investment in new data centres and office expansion.

Additional reporting by Matthew Rocco in New York

* This article has been amended since original publication to correct the figure for the after-tax hit to profits




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