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Alphabet Shares Tumble Thanks To Dismal Operating Margins

By Alex NewmanStock MarketsMay 12, 2018 02:07PM ET
www.investing.com/analysis/alphabet-shares-tumble-thanks-to-dismal-operating-margins-200315695
Alphabet Shares Tumble Thanks To Dismal Operating Margins
By Alex Newman   |  May 12, 2018 02:07PM ET
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Alphabet (NASDAQ:GOOGL), most popular for being the parent company of the worldwide famous search engine Google, saw its share prices seriously tumble after a disappointing corporate report indicated that the company’s operating margins wasn’t fairing as well as some onlookers had been expecting. The tech behemoth is one of the largest names in Silicon Valley, and indeed one of the most powerful companies in the world, but investors across the market are beginning to eye Alphabet shares with suspicion thanks to the recent lackluster news about its gross margins.

Not everything is doom and gloom for Alphabet, however; here’s a breakdown of why exactly Alphabet shares fell to the degree which they did, and how the company may turn things around to regain the confidence of its investors.

Operating margins are angering investors


Investors are pretty upset with Alphabet following a recent report, and for good reasons. The company’s spending has far exceeded what most were expecting, and shareholders are now worried that future profits could be jeopardized by the company’s extravagant spending. Taking a look at a handy chart of Alphabet’s gross profit margin, we can quickly see why investors are so worried: the company has been particularly reckless with its spending as of late, especially when it comes to its fabled “moonshot” investments, and shareholders are beginning to make their concerns heard through the market.

Last year’s first-quarter operating margins were hovering around 27 percent for Alphabet, which was an acceptable figure to a great deal of investors, but this year’s first-quarter operating margins have tumbled down to 22 percent, and tough headlines emanating from Silicon Valley have only exacerbated the company’s problems. After all, the world is furious with such established tech behemoths like Facebook (NASDAQ:FB), whose data-breach scandal continues to haunt it to this day, and few companies harvest consumer’s data in heaps and spades like Alphabet does. Still, it’s not so much the public outcry surrounding data privacy that’s hurting Alphabet’s stocks right now so much as its poor operating margins, which could stand to improve in the near future if savvy executives make better spending decisions.

After the first-quarter results surfaced on Monday, Alphabet’s shares lost an astonishing $37 billion in valuation – a truly awesome sum that would bankrupt smaller companies. Given that Alphabet was the world’s most valuable company as recently as 2016, however, even a mammoth loss of $37 billion doesn’t spell out too great a tragedy. For instance, investors who are worried about Alphabet’s margins will be vastly reassured when they learn that Google, Alphabet’s primary cash cow, is benefiting tremendously from the continuous pivot to the digital realm that advertisers are making. Marketing dollars from all around the world are pouring into Alphabet despite its margin worries, and there are plenty of reasons to look at Alphabet’s recent earnings report. The company has also started investing in the VR realm where companies like ImmVRse are implementing new technological standards. Thus, investors who are spooked by the recent news shouldn’t cut their losses and run from the search engine without taking all things into consideration first.

Competing with Amazon (NASDAQ:AMZN)


In the long-term, investors are much more interested in how Alphabet will be competing with the likes of Amazon than they are with the recent operating margins news. Amazon is decidedly winning the pivot to the smart home that’s enraptured the market currently, and some are worried that Alphabet doesn’t have what it takes to remain innovative enough to maintain its spot at the height of Silicon Valley’s list of elites.

As long as ad revenue continues to soar for Google, however, Alphabet may not have too much to worry about; after all, the search engine is by far the most popular in the world, with the term “to google” now having become a verb thanks to the promiscuity of the company’s leading service. Future regulations could put a serious dampen on Google’s prospects, especially if Washington takes contemporary fears surrounding Silicon Valley seriously, but there are few reasons to believe that Alphabet will be crippled in the long term thanks to less-than-stellar news about its operating margins.

Longer-term capital expenditures at Alphabet have also soared recently, with the company spending some $7.3 billion in the first quarter of this year while it only spent some $2.5 billion doing so last year. Thus, Alphabet’s eye is clearly on the big picture, and investors should consider its long-term innovations before abandoning it. As Google’s Cloud Services and disparate website and search engines grow in popularity, they’ll need larger and larger chunks of cash to be maintained, so expect Alphabet to continue expanding its long-term spending; it’s only logical, and indeed, you should be worried if the opposite starts to happen, as that will be an indicator of stormy weather ahead.

All in all, Alphabet’s shares may be hurting following the news about its operating margins, but don’t expect the Silicon Valley giant to give up its position as the top dog anytime soon.

Alphabet Shares Tumble Thanks To Dismal Operating Margins
 
Alphabet Shares Tumble Thanks To Dismal Operating Margins

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