Alphabet shares slide despite earnings beat

Key Points
  • Alphabet beat earnings per share estimates but came in short on revenue.
  • The company broke out Cloud and YouTube revenue for the first time.
  • The company recently passed $1 trillion in market cap for the first time.
Alphabet just reported earnings—Here's what four experts say to watch now
Alphabet just reported earnings—Here's what four experts say to watch now

Google parent company Alphabet's shares slid 4% after hours despite beating earnings estimates for the fourth quarter, as the company came in light on revenue.

Here are the numbers versus expectations:

  • Earnings: $15.35 per share vs. $12.53 per share, per Refinitiv consensus estimates.
  • Revenue: $46.08 billion vs. $46.94 billion, per Refinitiv.
  • Traffic acquisition costs: $8.50 billion, vs. $8.50 billion per StreetAccount estimates.

The company also reported YouTube and cloud revenue for the first time.

YouTube ads generated $15.15 billion in revenue in 2019, with $4.72 billion in the fourth quarter alone. The segment generated $11.16 billion in revenue in 2018, including $3.61 billion in the the fourth quarter of that year. The segment does not include YouTube's non-advertising revenue, like subscriptions for YouTube TV, which are included in Google's other revenue segment.

In a conference call following the earnings, Alphabet CEO Sundar Pichai said Google has two million YouTube TV Paid subscribers, ending 2019 at a $3 billion annual run rate in YouTube Subscriptions and other non-ad revenue in the fourth quarter.

Google's cloud business generated $8.92 billion in revenue in 2019, with $2.61 billion generated in the fourth quarter. That compares with 2018 fiscal year revenue of $5.84 billion for the cloud business, with $1.71 billion generated in the fourth quarter of that year. The cloud business ended 2019 with a $10 billion annual run rate, which is up 53% from last year, Pichai said on the conference call.

Google's total advertising revenue hit $37.93 billion in Q4, compared to $33.91 billion in Q3 and $32.63 billion in Q4 of last year. Advertising still makes up the vast majority of Alphabet's revenues. Pichai said that half of advertisers' Search spend is now from automated bidding.

Google's "other revenue," which includes hardware like its Pixel phones and cloud products, came in at $5.26 billion, compared to booking $6.43 billion last quarter and $6.48 billion in last year's Q4. CFO Ruth Porat said the company is still in "the early stages" of its "be-everywhere" hardware strategy called "ambient computing," which it hopes the Fitbit acquisition will bolster. She made note of three products that sold well last year: The Nest Mini, the Nest Hub Max and the Pixel 3A.

Revenue from "Other Bets," which includes Alphabet's self-driving car business Waymo as well as life sciences company Verily, came in at $172 million versus $154 million a year ago.

"Many of our bets are now getting to the stage where it now makes sense for them to partner closely with other players and investors in the industry," Pichai said.

The company's headcount, which is the largest driver of R&D expenses, grew by 4,903 employees in the fourth quarter, a 20% increase from a year ago, according to Porat. The most sizable growth occurred in Google Cloud, which included the Looker acquisition that closed in December. Porat said the company expects growth to be slightly higher next quarter due to "moving certain vendor functions in-house" and the Fitbit acquisition.

A mixed bag 

Alphabet had shown a mixed bag of results over the last few quarters.

This time last year, the company showed its first signs of a slowing advertising business after reporting its fourth quarter earnings for fiscal 2018. Then, in the spring, it closed its worst post-earnings day since April 2010 after reporting sluggish advertising numbers. The stock dropped 7.5%, shaving more than $67 billion from its market cap. In the third quarter, the company's stock fell as much as 4% after it missed estimates.

More recently, the company's stock performance has picked up after the promotion of Google CEO Sundar Pichai to take over the top spot as Alphabet CEO. Last month, it became the fourth U.S. company in history to reach a trillion-dollar market cap.

The biggest news of the quarter concerned this leadership change, as founders Larry Page and Sergey Brin stepped down from their roles as CEO and President, handing over the reins to Pichai. Chief Legal officer David Drummond, an early Google executive who has been the subject of a misconduct investigation, also retired at the end of January.

Google faces antitrust probes from the Justice Department and a coalition of 50 attorneys general across the country. Its YouTube subsidiary last year paid a $170 million settlement to the Federal Trade Commission over claims that it violated child privacy laws.

Google Cloud, Alphabet's hopeful future cash cow, made a series of acquisitions during the quarter, rounding out a year since CEO Thomas Kurian took the helm in early 2019. Under Kurian, Google has purchased at least five companies including Elastifile in June, CloudSimple in November, and Appsheet in early January. His largest was data analytics company Looker, which it bought for $2.6 billion last summer.

Correction: Alphabet reported earnings of $15.35 per share for Q4 2019.