Google falls on spend plans

By Sarah Ponczek, Janine Wolf and Mark Bergen

Shares in Google owner Alphabet fell sharply yesterday as investors baulked at the internet company’s rising capital spending plans.

The Nasdaq slumped more than 1%, with Alphabet’s rise in capital spending sending its shares lower by nearly 5% at one point. Shares of industrial bellwether Caterpillar quickly turned negative during the company’s earnings conference call after management said that the first quarter was its “high water mark” for the year.

US investors also focused on the rising 10-year yield and its implications for other assets. The dollar was flat after hitting the highest since January, while crude slipped back toward $68 a barrel.

Google’s parent posted its strongest sales growth in almost four years on Monday, indicating marketers kept flocking to its services amid rising scrutiny of digital ads.

However, the company also spent at historic levels, nearly tripling capital expenditure for the quarter to $7.7bn (€6.3bn).

Almost all of that spending went to buttress newer cloud and consumer-device businesses that lag behind leaders Amazon and Apple. After neglecting these markets for years in favour of its main ad businesses and riskier moonshot bets, Alphabet is now splurging to catch up.

“The big story from the results was the significant rise in expenses,” Brian Wieser, an analyst at Pivotal Research Group, said.

Other tech companies are spending prodigiously, too, as they hunt for new markets. In the fourth quarter, Amazon’s capital expenditure rose 50% and Facebook’s spending nearly doubled.

Alphabet’s rising first-quarter investments partly reflected a $2.4bn real-estate deal. Even without that, cap-ex more than doubled from a year earlier.

Chief financial officer Ruth Porat cautioned investors to expect more of the same.

“I wouldn’t suggest a one-off in terms of the investment we’re making. We’re really building out to support the growth that we’re seeing,” she said

Porat ticked off the items that are opening her wallet: data centres; three new undersea cables; processors, networking equipment and other machinery to power Google’s sprawling artificial intelligence efforts.

Chief executive Sundar Pichai told investors that Google’s nascent hardware unit, which builds smartphones and speakers rivaling Amazon and Apple, is two to three years from “the scale that we want to see”.

Bloomberg


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