Alphabet (GOOGL) reported better-than-expected first quarter results on Monday and, on prima facie, the results looked impressive. But Wall Street has a few concerns with its results. Google’s parent firm has been loosening its purse strings this year, spending a whopping $7.7 billion, three times the amount the company had spent in the prior-year quarter.
Last month, Alphabet bought the Chelsea Market building in Manhattan for $2.4 billion. Google is also investing in hardware, data centers, and undersea cables to beef up its infrastructure.
The new investments seem to be targeted at bolstering its artificial intelligence efforts, cloud services, and Google Assistant. It’s clear that Alphabet has turned its focus to new frontiers to reduce its dependency on its bread-and-butter advertising-based revenues. As a result, gross margins were down 3.7%, which is the largest decrease reported by the search giant.
Operating margins also decreased 5% in the first quarter to 22% due to increased marketing costs and content acquisition costs for YouTube. The company’s investments are expected to bear fruit in the long-term, but margins would be under pressure.
Post the data breach scandal that impacted Facebook badly, all the tech companies are under the federal government’s scrutiny. There is increasing pressure from the public to regulate these firms to make sure the personal data these firms collect are not at stake. Investors are worried that any regulation on this front would impact Google since ad revenues bring in a lion’s share of the revenues.
Alphabet has turned its focus to new frontiers to reduce its dependency on its bread-and-butter advertising-based revenues. As a result, gross margins were down 3.7%, which is the largest decrease reported by the search giant.
The company is confident of tackling any compliance-related issues. It’s worth noting that Google’s money spinner is search-based ad revenues; ads are shown based on the keywords typed by users. Hence, it doesn’t need any personal information related to user to show ads, unlike Facebook. It seems there would not be any immediate impact on its top line due to data privacy issues. Still, we need to wait and watch how things are going to unfold on the regulation front.
Google’s strategy seems to be clear; reduce dependence on ad revenues. With a renewed focus on cloud services and Pixel phones, the search giant is taking on Amazon (AMZN) and Apple (APPL). Investors are still wary about the increase in capex.
Shares tanked 5% on Tuesday at 4 PM ET touching $1,022. CEO Sundar Pichai and his team have their task cut out to make sure that its long-term bets will come to fruition.