Alphabet: More than Search

11/15/2019 5:00 am EST

Focus: TECHNOLOGY

Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Alphabet (GOOGL) is the umbrella company that owns Google (which includes Android and YouTube}, Nest (home automation), Calico (anti-aging research), Fiber (high-speed Internet), Google Ventures (new company investments), Sidewalk Labs (city infrastructure), and Waymo (driverless cars), notes Gordon Pape, editor of Internet Wealth Builder.

First, the good news. Alphabet's revenues were above expectations, coming in at $40.5 billion for the quarter ending Sept. 30. That was an increase of 20% over the same period last year (22% in constant currency terms). Mobile search, YouTube, and cloud computing were the main drivers of the increase.

For the first nine months of the fiscal year, revenues were $115.8 billion, an improvement of 18.7% over 2018.

Now for the negative side of the equation. Net income for the quarter was a shade over $7 billion ($10.12 per share, fully diluted). That was down from a profit of $9.2 billion ($13.06 per share) the year before.

Despite the disappointing third quarter numbers, Alphabet's year-to-date results show a slight gain in profitability, to $23.7 billion ($33.83 per share) from $21.8 billion ($30.95 per share).

The drop in third quarter profits was caused by a big jump in expenses in several areas. Research and development cost $6.6 billion during the quarter, up more than 25% from the same period in 2018.

Sales and marking expenses rose almost 20%, to $4.6 billion, while general and administration was up almost 48% to $2.6 billion. Total third quarter expenses were up about 25% from last year. Operating margin dropped from 26% last year to 23%.

After the results came out, the company announced it is buying Fitbit for $2.1 billion ($7.35 a share). The move will put Alphabet in competition with the Apple watch, at least as far as fitness tracking is concerned. With Alphabet's money behind it, we should expect Fitbit wearables to add a broader range of options.

The company is cash rich, with over $109 billion in cash and marketable securities and virtually no debt. However, to date it has stuck to its no dividend policy.

While it's understanding that management wants cash on hand for new investments, the fact that so much money is sitting idle suggests that, barring a major new acquisition, the board of directors may come under increased pressure to introduce a dividend.

Like other big tech companies, Alphabet is coming under increased regulatory scrutiny and taxes are being imposed on its activities in a growing number of countries. But so far, governments have not interfered unduly.

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