Alphabet’s Earnings Disappoint The Street

When earnings season comes to call, even Google/Alphabet can sing the blues, and Q2 has seen the band officially warming up.

Which is not to say the most recent earnings report lacked positive takeaways. The core Google business is strong, particularly on mobile, and revenue and profits are both heading in the right direction.

However, the stock went into something of a spiral in after-hours trading because the key to the earnings system is not absolute numbers so much as it is a check-in with how well firms beat analysts’ predictions or how hard those predictions beat them.

Google didn’t live up to expectations after taking larger-than-expected losses on some of its “moonshots,” like driverless cars and home automation.

Alphabet took a 6 percent haircut in its stock price, breaking up the 46 percent growth its seen over the last year. This, incidentally, has not been enough to dislodge Google from its number two spot on the list of most valuable companies on Earth. Apple still holds the top spot.

On the bright side, Google remains a leading digital ad platform and is capitalizing on the global shift to mobile by both users and advertisers to access the Internet through mobile devices. The Google search engine is the default on the bulk of mobile devices (and custom-installed on the ones where it isn’t), and according to digital marketing firm Merkle, the clicks on Google’s mobile search ads more than doubled in the first quarter. This makes it seem even more likely that 2016 will be the year that Google draws the bulk of its money in revenue from mobile, not desktop.

“Google is showing more ads in a smaller space … [and] people are clicking them more often,” said Macquarie Research Analyst Ben Schachter.

But those mobile ads have less value. The average cost of a click on one of its ads, across all devices, fell 9 percent, compared with 2015. Plus, Google doesn’t keep all that ad revenue on a phone; carriers and device makers (e.g., Apple) also grab a piece of those profits.

For the quarter, Alphabet reported net income of $4.21 billion, or $6.02 a share, up from $3.52 billion, or $5.10 a share, a year earlier. Analysts had expected earnings of $7.97 a share on that basis, according to Thomson Reuters.

Alphabet also faces increasing regulatory pressures after European antitrust regulators filed formal charges against the company earlier this week. EU regulators allege that Google used its dominant Android mobile operating system to benefit its search and advertising business on smartphones and leveraged its search rankings to favor its own shopping service. Google denies the accusations and is resolved to fight the charges.