Alphabet profit margins slide as Google costs march upward

Google parent Alphabet Inc. reported thinner profit margins as the internet giant spent heavily to expand its cloud and YouTube businesses.

The tech giant reported its fourth-quarter results after the close of markets, and its shares slipped in after-hours trading.

Google’s fourth-quarter capital expenditures jumped 80% to $6.85 billion. The company’s operating margin, a closely watched measure of profitability, was 21%, down from 24%.

Alphabet is relying on its ad business to support sales and profit growth as it develops new offerings such as cloud services and consumer hardware. The company’s higher-growth businesses, which also include YouTube, are less profitable than the original Google desktop search service.

Capital expenditures are “growing at a sizable clip, and the primary driver continues to be investing in technical infrastructure to support growth,” Alphabet Chief Financial Officer Ruth Porat said in an interview with Bloomberg TV. “By that we mean data centers and machines. This reflects our outlook for global growth in ads, search, YouTube and cloud.”

Costs were also pushed higher by spending on YouTube content and hiring, she added during a conference call with analysts. Alphabet had 98,771 employees at the end of 2018, up 23% from a year earlier. Porat said headcount growth should moderate in 2019.

Fourth-quarter sales, minus fees paid to partners, climbed 23% to $31.84 billion, the internet giant announced Monday. Analysts on average were expecting $31.33 billion, according to data compiled by Bloomberg. Net income was $8.9 billion, or $12.77 a share, compared with a loss of $4.35 a share a year earlier, when a one-time tax expense wiped out profit.

Alphabet shares declined 2.7% in extended trading following the report. Earlier, they closed at $1,141.42. The stock has gained 9.2% so far this year.

Alphabet’s cash and other short-term holdings totaled $109.14 billion at the end of 2018. The company is spending some of that on buying back an additional $12.5 billion of its Class C shares.

The cash hoard has also sparked speculation among some analysts that Alphabet will make a major acquisition to boost its cloud business.

“Acquisitions are an attractive complement to what we do to drive organic growth,” Porat said Monday. “We did more last year than prior, but they were small. We are very open to acquisitions.”