Big tech's spending spree shouldn't worry investors … yet

Facebook, Google and Amazon apps displayed on a smartphone.
Adam Jeffery | CNBC
Facebook, Google and Amazon apps displayed on a smartphone.

Tech earnings dominated the agenda last week and one theme ran through the major reports: the rising spending from the giants.

Google parent Alphabet reported traffic acquisition costs (TAC), a key metric that relates to how much the company pays to draw people to its various properties, rose above 28 percent to over $5 billion. This rise in cost was enough to send Alphabet shares down sharply in after-hours trade on Monday last week.

Amazon was a similar story. Its second-quarter earnings came in at 40 cents per share versus $1.42 per share expected, mainly because the e-commerce giant boosted investment. Spending on technology and content for example rose 43 percent year-on-year in the quarter. Amazon shares fell after-hours.

Facebook on the other hand reduced its forecast for its spending increase, which excited investors.

To me, the share price falls looked like a chance for investors to take profit on some tech stocks that have seen a stunning rally this year. But there's definitely some concern that costs could spiral out of control without any substantial return on profit.

But if you look at the specific areas companies are investing in, it should be a positive in the long run.

Take Alphabet for example. The higher TAC came as a result of more search coming from mobile. That's a great sign that Google is diversifying beyond desktop. On top of that, the company saw its operating loss narrow in its "other bets" segment - this includes "moonshot" projects like driverless cars - which shows some financial discipline from Alphabet.

Amazon meanwhile is trying to dominate every sector under the sun from content to food, shown by its near $14 billion acquisition of Whole Foods. It was a bold move, one that should raise some eyebrows from investors, but also show the company's ambition. And spending is something that Amazon has convinced investors is a positive.

"As investors, everyone knows that Amazon really doesn't care about the bottom line," Michael Yoshikami, founder of Destination Wealth Management, told CNBC last week. And this is a good way to see a lot of these tech businesses.

"What you're buying it for is top-line growth, revenue growth, market share — and I suspect when you go through the numbers you're going to see Amazon is making great progress," he said.

And this seems to ring true. Amazon has grown revenue even as it invests more while it's grabbing market share in a bunch of different product segments. Alphabet meanwhile saw advertising revenues grow, and it continues to report good momentum in its nascent cloud business. And Netflix, which has pledged to spend $6 billion on content this year, has seen a return with the fact that it added 5.2 million total memberships in the second quarter.

So far, big tech's spending spree is paying off. But that doesn't mean investors should take their eye off spending. Because if costs rise but companies' key metrics don't, that could spell trouble for the U.S.'s biggest tech firms.

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