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Alphabet misses profit estimates as Google bets big on newer businesses

Alphabet misses profit estimates as Google bets big on newer businesses
FILE PHOTO: A man walks through light rain in front of the Hey Google booth under construction at the Las Vegas Convention Center in preparation for the 2018 CES in Las Vegas, Nevada, U.S. January 8, 2018. REUTERS/Steve Marcus -
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Steve Marcus(Reuters)
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By Munsif Vengattil and Paresh Dave

(Reuters) – Google parent Alphabet Inc <GOOGL.O> missed analysts’ estimates for quarterly profit on Monday as it reported its highest-ever quarterly expenses, sending shares down about 1.2% even though revenue growth topped expectations.

The world’s dominant provider of internet search, advertising and video services has increased spending in recent years on areas including cloud computing and consumer electronics that it views as essential to maintaining its industry leadership in the face of stiff competition from Amazon.com Inc <AMZN.O> and Microsoft Corp <MSFT.O>.

Google, however, provides limited product-level financial disclosures compared with some peers, leaving investors increasingly uncertain about how pressures including regulatory scrutiny, advertiser boycotts and global trade tensions are affecting operations.

As a result, analysts say Alphabet shares have underperformed relative to rivals, rising 17% in the last 12 months entering Monday, compared with a 33% gain for Microsoft and 29% for Facebook Inc <FB.O>, the internet’s No. 2 seller of advertising.

Alphabet shares on Monday fell 1.2% in after-hours trade to $1,274.00.

Google has tried to demonstrate that its cloud-computing business is roaring, disclosing last quarter about $2 billion (£1.56 billion) in revenue and saying that plans continued to hire thousands for that unit to stoke growth.

Haris Anwar, analyst at financial markets platform Investing.com, said the quarterly results cast a cloud. “An earnings miss at a time when the big tech companies are being probed for their business practices adds to the uncertainty and creates a hint of pessimism around the company,” he said in an email to Reuters.

In hardware, Google’s debut in May of the Pixel 3a, its most affordable smartphone yet, went well, according to technology analysts. It boosted Google’s overall smartphone sales this summer in a typically slow quarter.

Google also has tried to reassure investors that there is no weakness in its YouTube video unit, while expressing confidence in its business overall through share buybacks.

But cash continues to be spent and higher costs loom as Google deals with clashes with regulators. Total expenses in the third quarter reached $31.3 billion, about 25% higher than a year ago and topping the previous high of $31.1 billion in the 2018 fourth quarter.

Google in the third quarter acknowledged investigations by the U.S. Congress, Department of Justice and 48 states into the company’s competitive practices. It settled a privacy investigation by the Federal Trade Commission. It also got an additional 90-day reprieve from an export ban that would restrict its relationship with Chinese smartphone maker Huawei, one of its top partners in distributing mobile apps.

Google has said it is cooperating with the increased scrutiny, while saying that it has survived calls for increased regulation many times.

Alphabet, which generates about 85 percent of its revenue from sales of ad space and ad technology, reported total third-quarter revenue of $40.5 billion. That was up 20% over last year and compared with 19% growth in the second quarter. Analysts on average estimated 19.52% growth and $40.325 billion in revenue, according to IBES data from Refinitiv.

Net income for the third quarter rose to $7.1 billion, or $10.12 per share, compared with analysts’ estimates of $8.811 billion, or $12.44 per share.

The operating margin was 23%, down from 24% in the second quarter.

Shares of Google closed 1.95% higher in regular trade on Monday. The shares earlier had risen about 2% after Reuters, citing sources, reported Google had made an offer to acquire U.S. wearable device maker Fitbit Inc <FIT.N>.

(Reporting by Munsif Vengattil in Bengaluru and Paresh Dave in San Diego; Editing by Leslie Adler)

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