Earlier this week, Google’s parent company Alphabet posted its underwhelming third-quarter earnings. The conglomerate’s year-on-year revenue rose 20 percent to $40.5 billion. However, the corporation’s operating costs totaled $31.3 billion, up 25 percent from the same frame last year. In addition, the firm made $6.7 billion in capital expenditures, an increase of 27 percent from Q3 2018.
The Big Tech firm’s income in the last quarter also fell below analyst estimates. Bloomberg reports industry experts pegged Google’s earnings at $12.35 per share. But the firm only generated profits of $12.10 per share or $7.1 billion. Moreover, the search engine company’s returns dipped by 22 percent year-on-year.
After publishing its disappointing Q3 2019 financials, Alphabet saw its stock price drop by 1.3 percent.
Cloud Spending is the Culprit
One of the big reasons Google experienced a dip in profitability last quarter is the firm’s interest in pursuing the cloud infrastructure market. In recent years, the corporation has dedicated considerable capital to purchasing equipment, recruiting engineers, and building data centers. Indeed, the firm increased its headcount by 6,450 people last quarter, mainly within its cloud computing division.
Thus far, Alphabet’s efforts to increase its share of the cloud services market have been successful but incremental. In Q4 2017, Google only represented 7.6 percent of the sector. But by Q4 2018, the corporation’s investments in the segment saw its market share rise to 9.5 percent. As a result, the firm’s cloud infrastructure business is predicted to generate about $8 billion in revenue this year.
Though a small fry now, Alphabet has the resources to increase its presence within the virtual private server industry substantially. With the right hires and contract acquisitions, the corporation could challenge Amazon and Google’s dominance of the $80 billion cloud infrastructure market.
Ad Business Uncertainties
In addition to it being a smart lateral move, Google has an incentive to diversify its portfolio quickly. Right now, the U.S. government is looking into how it conducts its ultra-lucrative online advertising business.
In June, The Burn-In reported the Justice Department had launched an investigation to determine if the corporation has engaged in anti-competitive practices. Moreover, in July, the Retail Industry Leaders Association filed a complaint with the Federal Trade Commission alleging Google uses its search engine ubiquity to control the flow of product and pricing information that gets to consumers.
Besides, the European Union (EU) levied a $1.7 billion antitrust fine against Google in March. The consortium’s regulator found the corporation used its reach to force retailers to enroll in its AdSense program. Indeed, the EU has slapped Alphabet with $9.3 billion in penalties for the way it operates its search algorithms.
Currently, Google is appealing the EU’s verdict. However, increasing international regulatory scrutiny is going to take a toll on the firm’s advertising segment, which generated $33.9 billion in revenue in Q3 2019. Accordingly, Alphabet’s decision to expand into a new sector will placate its shareholders while it weathers political headwinds.