Alphabet Inc: What Is Keeping GOOG Stock Subdued?

GOOG StockGOOG Stock to Benefit from Big Investments

Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) reported its fourth-quarter earnings Thursday, and investors were disappointed with the earnings report. GOOG stock was down over two percent in extended trading after falling a bit in the last trading session. The company’s earnings were hit by a one-time tax-related charge, but the company will take steps so that it does not happen again.

Alphabet Chief Financial Officer Ruth Porat said that the company growth in the fourth quarter was exceptional. Revenues went up by 22% year-on-year and by 24% on a constant currency basis, led by mobile search and “YouTube.” She further added there is great momentum in Google’s new investment areas and ongoing strong progress in “Other Bets.” (Source: “Alphabet Announces Fourth Quarter and Fiscal Year 2016 Results,” Alphabet Inc, January 26, 2017.)

Alphabet announced fourth-quarter adjusted earnings of $9.36 per share, which missed expectations by a wide margin. The reason was the one-time $586.0-million tax charge related to its stock-based compensation. However, the revenues at $26.0 billion surpassed consensus estimates. Still, GOOG stock has been hit by the earnings miss.

On a call with analysts, Porat said that the newer forms of advertising on Google, such as mobile searches, YouTube, and automated ad buying, are big opportunities that have still not been tapped. She further added that the new businesses of the cloud, hardware, and YouTube subscriptions could be “major revenue drivers for Google in the next several years.” (Source: “Google Parent Alphabet Finds New Growth Beyond Search,” The Wall Street Journal, January 26, 2017.)

Alphabet is trying to redirect its efforts as it tries to bring about some financial discipline in the company, which is good for Google stock.

In early January, it was reported that Google was planning to sell its satellite business to its competitor, Planet Labs, Inc. Google’s satellite-imagery unit, “Terra Bella,” was bought for $500.0 million in 2014 when it was known as “Skybox Imaging.” Google had plans to sell the data that it would collect through satellites. However, this was proving to be quite an expensive venture, and Alphabet realized that it could save money by buying the aerial imagery from other players in the field.

But Alphabet has taken a bold step by investing more in its hardware business, which is likely to be profitable for the company in the long term and push GOOG stock higher.

The Google “Pixel” smartphone has received good reviews so far and is turning out to be a strong contender in the smartphone market. With “Google Assistant,” Alphabet has put up a strong fight with the market leader, “Alexa,” from Amazon.com, Inc. (NASDAQ:AMZN), in the field of voice search.

And the company is making big investments for future growth, with capital expenditure touching almost $3.0 billion in the fourth quarter. This is also likely to keep Google stock subdued in the future.

Alphabet’s focus on new sources of growth away from its traditional search business shall take some time to fructify, but the company appears to be on the right track and GOOG stock will benefit from this strategy.