Google’s EU Fine And Spending Key To Alphabet Earnings
Haris Anwar | Jul 23, 2018 02:36AM ET
There are not many companies that can claim to be as powerful as Google’s parent Alphabet (NASDAQ:GOOGL). The unparalleled superiority was on display last week after it was slapped with a record $5 billion fine by the European Union for stifling competition and its stock hardly budged.
The fine came a few days before Google reports quarterly earnings after the bell Monday. Analysts, on average, expect the company earned $9.66 per share on revenue of $25.58 billion.
EU antitrust regulators ruled that the company, whose Android software powers more than 80% of the world's smartphones, pushed consumers to its search engine, putting rival search-engine providers and app makers in a disadvantageous position. The fine represents about 40% of Alphabet's net profit last year and less than 5% of the $102 billion in cash and short-term investments Alphabet had as of the last quarter.
The company said it would report a separate operating expense line on its income statement in its upcoming second-quarter earnings to reflect the charge. Google is appealing the ruling, but that money will remain in a holding account until a final decision is reached. We might get some insight from the Google executives when earnings arrive on whether this will be a problem in the medium term. But in the short run, earnings momentum remains strong.
Don’t Sweat Increased Spending, Stock Is Bullish Long Term
One of the key areas investors want to see an improvement is Google’s rising cost of doing business. In the first quarter, capital expenditure nearly tripled to $7.7 billion, as the company tried to catch up with rivals in the cloud computing and consumer device businesses. This spending surge is putting pressure on margins and making some short-term investors (who don’t have the patience for these investments to pay off) nervous.
We don’t see that trend reversing anytime soon. The company will still build future growth capabilities and continue to diversify its revenue base away from digital advertising, which still accounts for more than 86% of total sales.
Trading at about $1,200, Alphabet stock has gained 25% during the past year, riding successfully through the extreme volatility that we saw this year in the markets. This return is almost double than what S&P 500 produced during the same period.
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Google’s increased spending is a positive development in the long run. Google’s traditional growth drivers via mobile search remain unchallenged, while YouTube and programmatic advertising show robust growth. This is happening at a time when the company is aggressively investing in the future growth areas, such as driverless cars, the Internet of Things and cloud computing. We don’t think the time is right to turn bearish on this great company, which is firing on all cylinders.
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