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Alphabet's costs are swelling as it makes its big hardware push

Google CEO Sundar Pichai takes the stage during the presentation of new Google hardware in San Francisco on Oct. 4, 2016.
Beck Diefenbach | Reuters
Google CEO Sundar Pichai takes the stage during the presentation of new Google hardware in San Francisco on Oct. 4, 2016.

Alphabet earned less than expected during the quarter — partially due to the costs of a slew of new initiatives in its core business.

Increased costs in its newly expanded hardware business, including the Pixel phone and Google Home personal assistant; spending on data centers amid its ambitious cloud push; and content acquisition for YouTube were among the main factors weighing on earnings, chief financial officer Ruth Porat said in a call with investors.

Overall, cost of revenues increased from $8.19 billion a year ago to $10.66 billion in this year's fourth quarter, and went from 38 percent of revenue to 41 percent of revenue.

While they hurt the bottom line, the nature of the costs are a change for a company that's historically splurged in far-reaching projects. Porat has been lauded on Wall Street for reining in Google's "moonshot" projects.

The company posted fourth-quarter earnings per share of $9.36, adjusted and excluding items, on revenues of $26.06 billion on Thursday. Analysts expected $9.64 on $25.26 billion in revenue, according to a consensus estimate from Thomson Reuters.

The company's traffic acquisition costs hit $4.8 billion during the quarter, up from a year ago and higher than the $4.7 billion expected by a StreetAccount estimate. Porat blamed the fact that Google's strongest growth areas, search and programmatic, "carry a higher acquisition cost." The company also saw a 29 percent increase in stock based compensation.

Google CEO Sundar Pichai said there are two main areas of investment for YouTube: Improving the speed and searchability of the platform, and more original content, songs, and kids' shows.

Meanwhile, Google's core search advertisements getting more clicks than before, but making less money from them.

Google's costs-per-click — the amount it gets from advertisers— fell 16 percent year over year, more than the 11 percent expected by StreetAccount estimates. But eventually, ads on YouTube, and machine learning initiatives, could prove a transition point for Google.

Forrester analyst Thomas Husson compared Google to Apple, as both companies are diversifying beyond their historical core businesses. "Apple is starting to generate meaningful service revenue while hardware revenue is decelerating," Forrester analyst Thomas Husson told CNBC in a statement. "On the contrary, Alphabet is investing to be less directly dependent on Google's core advertising business."