Google beats estimates on revenue and profit, but shares fall on rising costs

Google's parent firm Alphabet topped consensus estimates in its fourth quarter results tonight, surpassing expectations for revenue and profit.

The tech giant reported net income of $8.9bn (£6.8bn), marking a turnaround from a $3bn loss in 2017 when it recorded a one-off tax charge of $9.9bn. This outperformed the average analyst prediction of $7.7bn, as collated by S&P Global Market Intelligence.

Revenue during the busy holiday quarter rose 21.5 per cent to $39.3bn, beating estimates of $38.9bn.

However Google's share price dropped more than three per cent in after-hours trading, as it revealed growing costs in its money-making advertising business. Traffic acquisition costs – the fees Google pays companies such as Apple to be its default search engine – rose 13 per cent in the last quarter alone to reach $7.4bn. 

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Advertising revenue as a whole jumped 20 per cent from last year to reach $32.6bn. Google's amount earned per click dropped 29 per cent over the same period, giving rise to fears that the firm may be losing its dominance in ad pricing to other rivals.

It reported a doubling of capital expenditure to just above $7bn, up from $5.6bn in the same period in 2017.

Its "other revenues" segment, which includes Google's cloud business and hardware sales, grew to $6.5bn in the fourth quarter, edging above estimates of $6.4bn.

Alphabet's chief financial officer Ruth Porat said the firm will be making "focused investments" in its talent and product infrastructure in the coming months. Headcount primarily grew in its cloud segment, rising to almost 99,000 employees over all from 80,000 a year ago.

"Alphabet is one of the most consistent large cap companies in the world with this quarter proving no exception," said Christopher Rossbach, chief investment officer at London-based private investment office J. Stern & Co.

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Meanwhile George Salmon, equity analyst at Hargreaves Lansdown, said Google's higher-than-expected capital expenditure is "concerning".

"While the core business is still growing impressively, the significant spending shows growth isn't quite as capital light as had been hoped," he said.

"Still, Alphabet generated $5.9bn in free cash flow this quarter. That means its cash pile is nearing $100bn, so it clearly has the financial firepower to go toe-to-toe with rivals like Amazon, who Alphabet is up against in cloud computing, and increasingly in the core advertising business too."