Alphabet's Q1 disappointing earnings overshadow Google's ad business

Alphabet announced disappointing Q1 earnings per share of $7.50, missing the Wall Street target of $7.96, despite Google's growing advertising business, 'substantial strength' on mobile devices and 'solid growth' in tablet and personal computer search. However, losses were incurred across various investments of speculative businesses, or 'moonshots', contributing to the increase of the division's operating losses from $633m to $802m. As search changes, Google is looking for other businesses opportunities, so it does not remain dependent on search ads.

Jessica Guynn

USA TODAY

SAN FRANCISCO — Google parent Alphabet reported first-quarter earnings that fell short of analyst expectations as growing losses from the tech giant’s investments in speculative businesses, from self-driving cars to speedy Internet access, overshadowed Google's booming advertising business.

Class A shares of Alphabet (GOOGL) fell 6% after hours to $732. They've rallied 44% in the past 12 months.

"Alphabet has made it pretty clear they weren't going to stop their investments in other areas, and they spent a little bit more than some people may have liked," said BGC Financial analyst Colin Gillis. "You don't necessarily like to see costs and losses growing faster than revenue, but that's where Alphabet's future is going to be."

Chief Financial Officer Ruth Porat, who joined the company last May in a hire investors hoped would curb spending, assured investors that Alphabet is "thoughtfully pursuing big bets."

Thursday was the second time Alphabet reported financial results after restructuring as Alphabet, separating Google's core business from its "other bets" or so-called "moonshots," many of which lose money.

Google parent Alphabet scrutinizing 'other bets'

Revenue from "other bets" in the first quarter doubled to $166 million, primarily generated by smart gadget maker Nest, life sciences research organization Verily and speedy Internet provider Fiber. But the operating loss from the division widened to $802 million from $633 million, spooking investors.

"We continue to invest across these opportunities, doing so in a disciplined way," Porat said, but hinted that poor performers inside Alphabet may find themselves on the chopping block.

"We continue to rationalize our portfolio of products to ensure we efficiently and effectively," she said.

On Thursday after the market closed, Alphabet reported first-quarter earnings per share excluding certain items of $7.50, missing the Wall Street target of $7.96, according to S&P Global Market Intelligence. Net income was $4.21 billion, or $6.02 a share, up from $3.52 billion, or $5.10 a share, a year ago.

Porat said it cost Google more to reach Internet users as they migrated to mobile devices from desktop computers, crimping profit margins. Also driving up costs: data center operations, YouTube content fees and the launch of new devices such as the Nexus smartphones and Chromecast media streaming dongle.

Buoyed by the growing number of Internet users searching on mobile devices, total revenue for the first three months of the year increased to $20.26 billion from $17.26 billion, falling below analyst estimates. Excluding payments of $3.79 billion to advertising partners, revenue was $16.47 billion.

Porat said Google saw "substantial strength" on mobile devices and "solid growth" in search on tablets and personal computers. She also said YouTube revenues were growing at a "very significant" clip, but did not offer details.

Since Google founder Larry Page took over as CEO in 2011, Alphabet's stock has jumped 163%, creating an additional $300 billion in shareholder wealth, according to The Associated Press. The S&P 500 rose 58% during the same period.

Google is not a company that can be judged by a single quarter's performance, said Gillis, who advised patience.

"The stock is just being a little 'Googly,'" he said. "There is nothing wrong with the company."