Alphabet had a massive quarter—but Wall Street is still not sold on its future

What else is there?
What else is there?
Image: AP/Kim Jin-a/Newsis
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The broth in Alphabet’s soup is still pretty much Google.

Alphabet announced its fourth-quarter earnings today. Wall Street had been expecting the company to post revenue of around $25 billion (up from $17 billion in the fourth quarter of 2015). Alphabet in fact generated more than $26 billion, up 22% over the same quarter last year. “Our growth in the fourth quarter was exceptional,” chief financial officer Ruth Porat said in a release. ”This performance was led by mobile search and YouTube.”

The overwhelming majority of that revenue—nearly 99%—came from Google. “Other Bets,” Alphabet’s catchall term for the companies and projects it’s exploring to diversify its revenue streams beyond search and advertising, lost roughly $1.1 billion in the fourth quarter.

It seems beating analysts’ revenue expectations wasn’t enough for Wall Street though: Alphabet’s stock price was trading down roughly 2.5% (about $20) in after-hours trading. It’s likely that a small miss in earnings-per-share ($9.36, excluding some expenses, versus $9.61 expected) caused some of the market’s consternation, as did the fact that Alphabet doesn’t seem to be reeling in those “Other Bets” losses.

Google is still generating lots of money

Wall Street ambivalence aside, Google is still finding ways to increase its revenue. Google revenue for the quarter was nearly $26 billion—up 22% over the same quarter last year—and it brought in $7.8 billion in profit, up roughly 17%. “2016 was a great year for Google, and 2017 is shaping up to be even better,” Google CEO Sundar Pichai said on the company’s earnings call.

That discrepancy between growth in quarterly revenue and quarterly profit, however, may give investors reason to be concerned about the long-term growth prospects of a company that has been so focused on search and advertising.

Hardware is hard

In October, Google launch a slate of self-branded products, arguably in an attempt to keep users locked into its ubiquitous software ecosystem, much as Apple does. The company released a new line of Pixel smartphones, a voice-activated smart speaker called Home, a virtual reality headset, wifi routers, and a new Chromecast streaming device. But it seems that these devices have not sold in quantities great enough to be noteworthy in Porat’s statement. Google did, however, report a 62% increase in non-advertising revenue over the same quarter in 2015. That roughly $1 billion increase was partially a result of an increase in hardware  sales.

And this could just be the beginning of Google’s hardware ambitions. Apple rakes in billions of dollars each quarter on iPhone sales alone, and did not report sales figures for many quarters after the initial launch of the iPhone 10 years ago. It remains to be seen whether anyone will want to switch to a Google-branded phone (in the US, initially, these phones were only available through Verizon), and whether Google’s smart-hub offering can differentiate itself enough from the early leader in the space, the Amazon Echo.

What comes after search

On Alphabet’s earnings call, Porat said sales in programmatic and YouTube advertising helped drive Google’s revenue growth in the quarter, and that cloud services constituted a “priority area” for Google’s hiring in 2017. Additionally, she said that Google’s non-advertising revenue growth was promising, and primarily driven by a mixture of hardware sales, media and app sales through the Google Play store, and cloud services, a business line in which the company is investing. ”We see tremendous potential in these businesses,” Porat said, adding that Google is also investing in machine learning and “next-generation” computing systems.

“Our cloud business is on a terrific upswing,” Pichai added. For all the growth in non-advertising revenue, however, 87% of Google’s revenue is still from advertising sales—although this is down from about 90% in the same quarter last year.

Other Bets are still just bets

Although Alphabet has grand designs on changing the world with self-driving cars, cures for disease, internet balloons, and all sorts of other fantastical projects, for now those ambitions are mostly money pits. A few Other Bets companies have put products on the market—smart-home-technology company Nest and broadband internet provider Fiber—but neither has driven noticeable revenue. In fact, Fiber has “paused operations” and Nest had a tumultuous 2016, with multiple top executives leaving the company.

Other Bets did at least reduce its losses over the same quarter a year ago—$1.24 billion in the fourth quarter of 2016, versus $1.08 billion in 2015. Porat added on the call that for the full year, Other Bets generated $809 million in revenue, led by Nest, Fiber, and Verily, its life-sciences division. But the division lost $3.6 billion over the same period.