(Reuters) – Google parent Alphabet Inc (GOOGL.O) on Thursday reported slower third-quarter revenue growth than analysts had expected, with ad sales barely topping estimates and other revenue missing forecasts, sending shares down more than 4 percent after hours.
FILE PHOTO: A Google sign is seen during the WAIC (World Artificial Intelligence Conference) in Shanghai, China, September 17, 2018. REUTERS/Aly Song/File Photo
Rising expenses also brought down the company’s operating margin to 25 percent from 28 percent a year ago.
The tech company’s third-quarter results fanned investor concern that big investments in new businesses, increasing regulatory scrutiny and emerging competition are delivering slow an unpredictable returns.
“Google’s earnings momentum remains strong,” said Haris Anwar, senior analyst at Investing.com. “But if you dig in a little deeper, there are cost pressures which are building up and are mainly responsible for this period’s disappointment.”
Shares of Alphabet fell 4.4 percent to $1,055 after hours from their close at $1103.59.
Revenue rose to $33.74 billion, but that missed analysts’ average estimate of $34.05 billion, according to Refinitiv data.
Alphabet reported net profit of $9.19 billion, or $13.06 per share, compared with $6.73 billion, or $9.57 per share in the year-ago quarter. That beat the average analyst estimate of $10.45.
Google has posted strong revenue growth for several years as retailers flock to buy product image ads on Google’s search engine and commercials on YouTube.
Third quarter ad revenue was about $29 billion, up 20.3 percent from a year ago and above the average estimate of $28.762 billion.
Though ad revenue has fueled Google for 20 years, the company has committed to providing cloud computing services and selling hardware over the last few years.
Sales from those businesses combined with revenue from what Alphabet calls “other bets” in healthcare and internet infrastructure were $4.79 billion in third quarter, 43 percent above the same period last year, but below analysts’ estimate of $4.94 billion.
Steady revenue growth had helped Alphabet weather an otherwise bruising last few months on the stock market for big technology and communications companies. Rising interest rates have also drawn investors away from stocks.
Alphabet gained 5.8 percent this year entering Thursday and traded at 24 times expected earnings over the next year. Shares of No. 2 online ad firm Facebook Inc (FB.O), which faces questions about flattening usage limiting revenue growth, had fallen 12.5 percent and were trading at 19 times future earnings.
Priming Alphabet’s newer ventures has been costly in terms of marketing and hiring, with about 5,300 employees added in the third quarter. Costs also have been affected by surges in Google usage on smartphones, where the company splits ad revenue with technology makers such as Apple Inc (AAPL.O), and smart speakers, where ads do not appear.
Its cost of revenue was $14.3 billion, up 28 percent from a year ago, though below the average analyst estimate of $14.5 billion.
Google has been fined $7.7 billion for antitrust violations in Europe over the last two years and heightened attention on privacy, security, competition and the rise of artificial intelligence tools could lead to potentially costly regulatory scrutiny in the United States and elsewhere.
Most recently, U.S. lawmakers and European data protection authorities have questioned Google over why it waited months until September to disclose a security vulnerability involving its struggling Google+ social media system.
Rivals such as Apple have tried to seize the moment by touting privacy practices that they contend are more consumer-friendly.
Meanwhile, Amazon.com Inc (AMZN.O) has lured a subset of advertisers from Google with ads for shoppers on its site.
(This story was refiled to change Alphabet’s to Alphabet in the headline. The error first occurred in first update.)
Reporting by Munsif Vengattil in Bengaluru and Paresh Dave in San Francisco; Editing by Bernard Orr and Bill Rigby