Alphabet Inc. Should Focus On Its Core

Ad price declines are having a major impact on Alphabet’s (GOOG) top and bottom lines. The tech giant’s stock fell 6% after last week’s earnings report was released. Let’s review the major points:

• Revenue was up 17.4% year over year to $20.26 billion, but missed analyst expectations by $110 million.
• Earnings per share came in at $7.50, missing the consensus by a wide margin of $0.47.
• Cost per click on ads was down 9% year over year and flat quarter over quarter. CPCs fell on Google sites by 12% and 8% elsewhere. YouTube video ad growth has had a negative effect on CPCs.
• Operating loss from Alphabet’s Other Bets segment — mostly made up of Nest, Dropcam and Google Fiber — was $802 million despite a revenue rise of 108% to $166 million.
• Google segment revenue was up 17% year over year and operating profit rose 21%.
• Foreign exchange had a negative impact on revenue, dropping it from 23% growth to 17%.

The problem lies with Other Bets

Alphabet has long been happy to expand its presence beyond search. It’s growing increasingly evident, however, that it may be better off sticking to its core business. With the Other Bets segment showing an operating loss five times that of its revenue, these moonshot projects may not be worth it.

Of course, that doesn’t mean Alphabet’s going to give up on its Other Bets segment. In fact, reports say that the company is planning to create a unit that allows its employees to create their own startups. I can’t actually blame them for it, considering how many employees have left the company in recent years to form their own startup.

According to reports, employees who are accepted to the Area 120 “startup incubator” will be able to work on their projects full-time for a few months, after which they’ll pitch their idea to Alphabet, which can then create a new company it has a stake in.

Not a bad idea considering the Silicon Valley atmosphere, but again, it makes me wonder if Google is spreading itself too thin. After all, startups require a lot of capital upfront with absolutely no guarantee of success. Likely, these newly formed companies would be relegated to the Other Bets segment, which means even more investment than revenue.

Not as bad as it seems

As a whole, Alphabet isn’t doing that bad. Adjusted revenue growth of 23% is pretty impressive actually, considering where the company is in terms of its life cycle. Mobile search and YouTube also remain solid, as is Google Play. If the Other Bets segment continues to grow, however, that could put a major damper on future earnings reports.

Analysts also hold that sentiment, with several of them dropping their price targets, even if they maintain their “Buy” ratings. If Alphabet wants to continue to remain competitive in its core business, it should consider trimming the fat, so to speak, and reevaluating its investments in random side projects.