Alphabet (GOOG) dropped 3.1% in after hours trading in spite of reporting earnings of $5.01 a share, well ahead of the $4.49 expected by Wall Street. Revenue of $26.01 billion, up 21% from the second quarter of 2016, also beat the Wall Street consensus of $25.6 billion. The 21% growth rate was better than the 19% growth in revenue that Wall Street expected. Revenue growth came mostly from increased ads on YouTube and on mobile search. Alphabet said YouTube now reaches 1.5 billion monthly users.
What investors and traders didn’t like, though, was a drop in the cost per click of 23%. Cost per click is what advertisers pay each time a user clicks on an ad served by Google. Wall Street had modeled a drop of 15% in the cost per click. The greater than expected decline was a result of more search traffic coming from mobil devices, a continuing long-term trend that has dinged Alphabet in the past. (Cost per click fell 26% on Google Properties and 11% on properties of Google Network Members.) It also hurt that traffic acquisition costs of $5.09 billion were higher than analyst estimates of $4.75 billion. Alphabet CFO Ruth Porat said that she expected traffic acquisition costs to continue to rise and that marketing costs will be higher in the second half of the year than in the first half as the company spends to expand its cloud business and to promote its hardware products.
Alphabet’s notorious Other Bets unit–those businesses that represent bets on emerging technologies or opportunities that often lie outside the company’s core business and that frequently lose money–saw revenue climb to $248 million, a 34% year over year increase. That shrunk operating loss for Other Bets to $772 versus Wall Street projections of a $970 million loss.
This quarter Alphabet also got socked with a $2.74 billion fine by the European Community. Alphabet included that fine in “accrued expense and other current liabilities” on its balance sheet. The European Community imposed the fine because of what it saw as problems with how Google ranked and displayed search results.
Wall Street is concerned about the possibility that the recent fine isn’t the end of the company’s regulatory problems in Europe, especially as the company tries to find more ways to increase revenue in the shift to smart-phone-based search.
Alphabet has been a member of my long-term 50 Stocks Portfolio since December 30, 2008. The shares are up 549% since then as of the close on July 24 at $980.34.