Alphabet stock drops on concerns that revenue growth is going to cost more

Key Points
  • Google parent Alphabet reported a second-quarter profit that fell sharply from a year earlier, hurt by a big anti-trust fine in Europe.
  • Alphabet shares slipped in after-hours trading after its cost-per-click number fell 23 percent, more than the 15 percent drop analysts expected.
Alphabet beats on top line
Alphabet beats on top line

Alphabet reported a steep drop in second-quarter profit thanks to a $2.74 billion fine European antitrust regulators slapped on its Google unit.

Shares fell as much as 3 percent in after hours trading as the company reported worse-than-expected performance on two key metrics: cost per click and traffic acquisition costs, or TAC.

Here are the numbers:

  • EPS: $5.01 versus $4.49 expected
  • Revenue: $26.01 billion, up from $21.5 billion a year ago
  • Paid clicks: +52% from a year ago
  • Cost per click: (23%) from a year ago

The drop in cost per click -- the amount advertisers are paying each time a user clicks on an ad served by Google -- was much higher than the 15 percent analysts expected, according to StreetAccount, due to more search traffic coming from mobile devices.

Traffic acquisition costs amounted to $5.09 billion, higher than analyst estimates of $4.75 billion.

Alphabet CFO Ruth Porat said on a conference call with analysts that the shift to mobile search traffic and automated purchases made by ad clients -- better known as programmatic advertising -- both carry higher costs.

"We do expect TAC costs to increase," Porat said.

Still, the company said operating income excluding the EU fine rose 15 percent from a year earlier.

Revenue jumped almost 21 percent from a year ago, more than the 19 percent rise Wall Street analysts expected.

Alphabet is focused on "dollar growth" in revenue and operating income, "not margins," Porat said.

Operating income was boosted by slower growth in the company's capital expenditures, which reflected a pause in the expansion of its Google Fiber business, Porat said on a call with reporters after the results were announced.

'YouTube is scaling ... like search'

The company's revenue growth was powered mainly by YouTube ads and mobile search ads.

Alphabet has been adding new content as it races and traditional TV networks for a share of the surging market for digital video ads.

that it reaches 1.5 billion monthly users and would add 12 new TV shows to the 37 it already has on its YouTube Red service.

Google CEO Sundar Pichai said on the call that YouTube was seeing "strong growth" in emerging markets, with mobile users and on "large screens," meaning TVs.

"YouTube is scaling really well search," said Pichai, who earlier Monday was added to the company's board, which is already heavy with insiders.

The company added more than 1,000 workers during the quarter, most of them in Google's cloud business, and now has more than 75,600 employees.

Alphabet is also updating its core search product as more consumers use its service via smartphones.

Still, its drive to innovate has run into a regulatory wall in Europe, where regulators ruled Google used its monopoly position in search advertising to hurt rivals by favoring its online shopping service over competitors, and fined the company $2.74 billion.

"There's a lot of follow-on risk associated with this" (EU fine) said Mark Mahaney, analyst with RBC Capital Markets, in an interview with CNBC before the results were released.

The company also expects marketing costs to be higher in the second half of this year than in the first, Porat told analysts, due to spending on its cloud business and to promote its hardware products.

Class A shares of Alphabet are up more than 25 percent so far this year.

Alphabet beats on top line
Alphabet beats on top line