David Garrity on Bloomberg: Alphabet’s Clouded Profit Outlook Disheartens Investors

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GOOGL Results Show Slowing Core Online Ad Business, Investors Flee Shares As Profit Doubts Grow

The 1Q19 results for GOOGL fell well short of expectations (Revs $36.3bn (Street $37.3bn), EPS $9.50 (Street $10.17)) as revenue growth slowed to +17% year/year (4Q18 +22%, 1Q18 +26%), a performance that prompted an after-hours share price sell-off of -7.4%. The fact is that competition in the online ad space is growing as shown by AMZN’s 1Q19 growth of +34% year/year in its online advertising revenues. Meanwhile, as GOOGL’s core business is decelerating, the company is ramping up spending to develop new business lines (e.g. Waymo autonomous vehicles) and to position itself for technology sector transitions (e.g. voice-based computing (i.e. Google Home), foldable smartphones (i.e. Samsung phone)). Some of these initiatives have an uncertain payoff horizon and some may never prove profitable. Consequently, investors when confronted with decelerating growth and a clouded profit outlook are lowering their exposure until such time as prospects become more certain.

AAPL Outlook Hinges On Stable Smartphone Market & Services Platform Growth

AAPL 1Q19 results expectations (Revs $57.5bn (-6% year/year), EPS $2.37 (-13% year/year)) reflect the company’s January 2019 announcement that iPhone sales were declining in critical markets such as China as consumers suffering from a slowing economy respond to increasing handset prices by holding onto current handsets longer. Overall iPhone sales are expected to drop -19% year/year to $30.5bn. Away from the declining core smartphone business, AAPL’s Services business, an area the company has been highlighting as an area of growth, is expected to generate revenues of $11.2bn, up +22% year/year. Meanwhile, based on its recent streaming media service announcement, AAPL is positioning itself to expand its services offering significantly later in 2019. With AAPL expected to increase its return of cast to investors through both its share repurchase program and dividend payout, AAPL shares should be able to sustain the +41% gain realized from its previous lows.