Despite forecast-busting growth in its core revenue source of digital advertising, Google-parent Alphabet saw markets punish its share price to the tune of over 3% in afterhours trading yesterday. The search engine and tech giant’s investors were concerned by another facet to its earnings report – capital spending of $25.1 billion over the course of 2018. The total investment was substantially added to over the last three months of 2018, which saw $7.1 billion invested. 2017’s total capital spending bill amounted to $13.2 billion.
Swelling capital spending has become a trend among the biggest tech companies on Wall Street as they look for new products to maintain the revenue growth that underpins their hefty valuations. Amazon, Apple and Facebook also splurged in 2018 as core revenue generators mature. Just being a cash cow is not enough for companies whose histories have seen nothing but exponential growth figures to date.
However, despite the furrowed brows at what was presumably perceived by markets as a lack of financial discipline, Alphabet still posted results that came in ahead of estimates for both revenues and profits. Last year’s fourth quarter revenue rose to $39.3 billion, up $7 billion on the same period of 2017. Profits of $8.9 billion were booked compared to a loss of $3 billion a year ago. However, the 2017 figure was hit by a $9.9 billion charge connected to 2018 tax cuts.
Google, Alphabet’s main business unit, holds a market share of over 30% of the global digital advertising market, which is expected to be worth $327 billion over 2019. That includes advertising revenues from YouTube, Gmail, Google Maps, Android and the Chrome web browser as well as the Google search engine. Advertising revenue makes up around 85% of Alphabet’s total revenues.
Alphabet’s capital spending is primarily focused on its ‘other bets’ unit which includes driverless car project Waymo and Loon, which aims to build a network of stratospheric balloons designed to allow for global internet access. Waymo, while currently a major investment expense, is leading the driverless vehicles technology race and is believed to hold the potential to be a mainstay of Alphabet’s future growth. However, it will be another several years before regulation catches up and the business can hope to begin to see a return on that investment.
Alphabet did indicate that it expects capital expenditure over 2019 to be significantly less on investment over the past year.Risk Warning:
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