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Three Red Flags In Alphabet’s Earnings That Sent Its Shares Down 7%

Google parent Alphabet’s stock tumbled 7% after reporting its first-quarter earnings that included some troubling signs including slowing growth, difficulties in its hardware division, and disappointing guidance.

After the market closed, the company’s shares fell to $1,200.70 from $1,296.20.

Google CEO Sundar Pichai tried to reassure investors by suggesting the problems were only temporary.

“We’ve always been a company focused on the long-term, willing to make investments that will help our businesses and our customers’ businesses succeed as technologies evolve,” he said.

Alphabet reported a 17% gain in revenue to $36.33 billion, missing analysts’ projections of $37.34 billion. Profits fell 29% to $6.66 billion, or $9.50 per share. Income was impacted by a $1.7 billion fine levied by the European Union for Google infringing on European competition law with its AdSense product. Excluding the fine, profits would have been $8.34 billion, or $11.90 per share, versus $9.4 billion during the same quarter last year.

Here’s a look at three problems that Google revealed in its first quarter earnings.

Challenging Outlook

Alphabet said currency exchange rates and changes to its ad product had depressed its financial performance and would continue to do so in the second quarter. It also said that unspecified changes it made to its ad product could negatively impact growth. Pichai said the company plans to continue to make changes “with a focus on the long-term best interest of users and advertisers,” meaning expect some short-term impact on growth. Google’s ad team makes about 100 tweaks to the product each quarter, Pichai said, adding that planned changes would include artificial intelligence and machine learning—two buzz words that many executives now use when trying to reassure skeptical investors.

Growth Rate Decelerating

While Alphabet continues to grow, the speed at which it’s growing—overall and in its main ad business—has slowed. Revenue increased 17% from the same period last year, down from the third and fourth quarters of last year during which it reported 22% and 21% growth, respectively. Meanwhile, paid clicks—the number of times users clicked on an ad on Google properties—fell 9%, compared to 10% growth in third quarter of last year and 22% in the fourth quarter. Alphabet said the deceleration was driven by the slowing rate of clicks on YouTube ads.

Hardware Drags Down ‘Other Revenues’

Alphabet said its “other” revenues, which include Google Play, Google Cloud, and hardware, grew 25% from the same period last year. But those number were partly dragged down by weak hardware sales, primarily due to a slow in Pixel phone sales and the “pressures in the premium smartphone market.”

The company said quarterly sales for “other” was $5.45 billion, up from $4.35 billion in the first quarter of 2018. But Alphabet said that the growth of its cloud and Play business was partially offset by weak hardware sales.

Google is still “early in its hardware journey,” Pichai said about what is a nearly decade-old business. “Overall, we view it as hugely important opportunity.”

When it comes to Pixel, Google’s high-end mobile phone, Pichai said the mobile phone industry is “working through a phase where there’s definite headwinds.” Although he didn’t go into details, sales of high-end smartphones are stagnant or down across the industry.

However, Pichai said he’s optimistic about 5G, the speedier successor to 4G LTE, and the opportunities the new network will provide. He also said he was pleased by the sales of Google’s connected-home products and is hopeful about the long-term future of its hardware business. The company plans to announce new hardware products on May 7.