To buy, or not to buy...
Photograph by Bloomberg via Getty Images
By Mathew Ingram
January 26, 2017

Alphabet is best known as the holding company that owns Google. But its focus is increasingly on all of the other bets it has made—whether it’s a bet on the future of home automation, with products like the Nest thermostat and the Google Home smart assistant, or bets on mobile hardware like its new Pixel line of smartphones.

That doesn’t mean anything is wrong with Google itself. Far from it, in fact. The search engine continues to be a giant cash-spewing machine at the center of the Alphabet universe, providing the seemingly never-ending stream of money that has allowed the company to branch out in many different directions.

Although traditional web advertising is weakening, Google has been able to more than make up for that weakness by expanding rapidly in mobile and by doubling down on programmatic advertising, in which algorithms and bots do all of the buying and selling of ads in real time.

Google’s overall revenue climbed 25% in the most recent quarter to $25.8 billion. Not surprisingly, that made up the vast majority of Alphabet’s revenue, which grew 22% year over year to $26.1 billion.

However, the company’s earnings of $9.36 per share (excluding certain items) were well below the consensus estimate of $9.64, which helped push the stock down (GOOG) by more than 3% in after-hours trading on Thursday.

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One of the culprits behind those weak earnings was rising costs. According to Alphabet chief financial officer Ruth Porat, traffic-acquisition costs—the commissions Google pays to partner sites that run its ads and drive users to its search engine—rose to 22% of revenues in the latest quarter, primarily because such costs are higher for mobile and programmatic ads.

However, the company also noted that revenues from things other than advertising—a category that includes the YouTube Red video-subscription service, Google Play, Google’s cloud services and the new Pixel smartphones—climbed 62% in the latest quarter. There wasn’t a lot of detail given about the new Pixel phones, except to say that the market’s response was “promising.”

For Alphabet itself, revenue for the “Other Bets” category, which includes Nest, Google Fiber and the life-sciences unit Verily, climbed 82% to $809 million, although the group had an operating loss of $3.6 billion.

Alphabet spent much of the past year narrowing the number of those bets, including shelving a delivery-drone project, scaling back its Google Fiber Internet-access service, and spinning its self-driving car technology off as a separate entity called Waymo.

Google CEO Sundar Pichai said on the company’s conference call on Thursday that he believes one of the keys to the future is machine learning and artificial intelligence, which the company hopes will drive everything from home automation platforms like Nest and Google Home to mobile smart assistants, and even smarter recommendations on YouTube.

So in a sense, Alphabet and Google still plan to be focused on search—but they want to do it in your car and on your phone and in your house through voice recognition, instead of just through a toolbar in your web browser or a standalone website.

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