Alphabet Stocks Drop 3% As Investors Worry About Amazon

Wall Street greeted the news Alphabet, parent company of Google Inc, which posted an $8.94 billion profit in the 4th quarter of 2018, with a 3.69 percent pummeling of its stock price during extended trading.

Alphabet took the hit as investors fret that continuing downward pressure on advertising prices and thinning margins might be symptoms of looming problems facing Google over the horizon. This problem has a name: Amazon.

Google is being heavily challenged in digital advertising by Amazon’s increasingly formidable presence. This more intense competition is seeing heightened downward pricing pressure being placed on Google, whose costs of doing business are also on the rise.

All this even as Alphabet released mostly upbeat news yesterday about its Q4 results, beating analysts’ forecasts in key metrics in many instances.

In its announcement, Alphabet said Google and the other companies under its wing earned $39.27 billion, up 22 percent from $32.3 billion in Q4 2017. Revenues in the U.S. rose 20 percent while revenues from Europe, the Middle East and Africa jumped 29 percent due to the stronger euro and British pound. Net income in Q4 2018 stood at $8.94 billion.

Other revenue for Q4 2018 came in at $6.4 billion compared to $4.6 billion the same quarter last year.

“Everything we do at Google is united by the mission of making information accessible and useful for everyone,” said CEO Sundar Pichai during the earnings call.

“Providing accurate and trusted information at the scale the Internet has reached is an extremely complex challenge and one that is constantly getting harder.”

Alphabet said its Q4 results slightly surpassed analyst expectations. One of these analysts, data firm Refinitiv, projected Alphabet’s EPS at $10.82 per share compared to the actual $12.77 per share. Refinitiv also estimated revenue at $38.93 billion compared to the actual $39.27 billion.

Cost per click, which somewhat measures the amount Alphabet charges advertisers for each ad served on its web sites, plummeted 29 percent from 2017 and 9 percent from Q3. These declines raised alarm bells among investors concerned that Google’s pricing power for ads continues to erode.

Alphabet reported capital expenditures of more than $7 billion for Q4, easily surpassing the $5.63 billion in capex it planned to spend during the quarter. It revealed an operating margin of 21 percent for the fourth quarter, which was lower than the projected 22 percent margin and the 23 percent margin it reported in Q4 2017.

Google’s full-year operating margin fell by more than 2 percent from Q4 2017, representing a far larger decline than the overall business.

Analysts said Google’s core advertising business is starting to plateau, an indication of stiffening competition. Q4 2018 advertising revenue remained flat at $32.6 billion. This represented a growth of 20 percent, which was the same rate of growth for Q4 2017 compared to Q4 2016.

Alphabet’s full-year 2018 results were also reassuring.

“In 2018 we delivered strong revenue growth, up 23% year over year to $136.8 billion, and up 22% for the fourth quarter to $39.3 billion,” said Ruth Porat, Alphabet and Google CFO. “With great opportunities ahead, we continue to make focused investments in the talent and infrastructure needed to bring exceptional products and experiences to our users, advertisers and partners around the globe.”