Google is the giant of the web. With its numerous apps and products, the company is literally sitting on top of the food chain by conquering most of the internet market.
However, Alphabet, Google’s parent, announced something that didn't please investors: its quarterly profit fell 23% after the company sharply increased spending for research and development.
Alphabet reported that its revenue rose 20% to $40.5 billion for the third quarter, but that profit dropped to $7.07 billion.
The profit, which missed Wall Street forecasts, was hurt by rising costs for research and development and marketing, the company said.
In after-hours trading, Alphabet’s stock declined by 2%.
Google is a large company. With influence reaching every corners of the web, Google is certainly at the pinnacle of what most internet companies could only dream of.
However, its sheer power over the market means that the company should overcome challenges of trying to maintain growth.
In other words, Google must continue investing to keep its throne.
While advertising, rooted in the dominance of Google’s internet search engine, has sustained Alphabet’s bottom line in recent years, that business isn’t growing as fast as it once did. Most notably, this is because Facebook is eating more and more of Google's share in the market, with Amazon following closely behind it.
Alphabet also faces other challenges.
For example, the company is a target by many regulators around the world, including politicians who want to take down its monopoly. Political conservatives have also accused the company of bias, and YouTube has been under attack for spreading misinformation.
Google is also having troubles internally, as many of its employees have been unhappy with the company's management.
Acknowledging this, Google tried to reduce its reliance on advertising revenue, and put more its efforts and money to please corporate customers. The company has leveraged its cloud platform, to compete better with Microsoft and Amazon, as well as increasing its effort on Android, to better compete with Apple's iPhones.
The company has also put a significant amount of money to develop more advanced AIs and also to develop moonshot products, including self-driving cars and cellular connectivity.
But to make these happen, Google needed to spend a lot of money, as well as hiring more employees. The company also needed to invest more into data centers, and pay more for marketing.
While the future is yet to be written, the public knows that Google Cloud is growing rapidly, but remains behind Amazon and Microsoft. Google’s smartphones are getting better, but they are still an afterthought to Apple and Samsung phones.
In addition to rising expenses, Alphabet said that it incurred a $1.5 billion loss after writing down its investments in the ride-hailing companies Uber and Lyft. The company had made those investments through its various venture capital arms.
In total, Alphabet’s expenses grew 25%, outpacing revenue growth, and had its tax rate doubled to 18% from 9% in 2018.
Google is positive that its investment will have fruitful results. It's just that those investments have not yet paid off.
And this makes investors unhappy.
