In this segment from the MarketFoolery podcast, host Chris Hill is joined by special guest Bill Mann of Motley Fool One to discuss Alphabet's (GOOGL -0.95%) (GOOG -1.22%) latest quarterly report, which on the face of it looks like one that should have pleased shareholders.
It's tough to argue with $31 billion in quarterly revenue and $9 billion in profit. The guys see part of the decline as a matter of high expectations. But they also suspect that many investors don't quite get how the company is treating its "Other Bets" category and its smart-home aspirations.
A full transcript follows the video.
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This video was recorded on April 24, 2018.
Chris Hill: We've got to start, though, with the proverbial 800-pound gorilla of the advertising world, and that's Alphabet, aka Google. First quarter, ad revenue was up 24% --
Bill Mann: That's amazing!
Hill: -- year over year, and that's only, I don't know, 87% of the core Google business.
Mann: Yeah, $31 billion in quarterly revenue.
Hill: And over $9 billion in profit.
Mann: Yeah. Alphabet had some numbers this quarter.
Hill: And we'll get into a couple of the other numbers, but just in terms of the bread and butter of this business, they crushed it.
Mann: They did. And the market doesn't seem to like it very much. The stock was down pretty sharply this morning, if $40 billion in market cap being evaporated is something that you think is important. It was a good quarter. They've had good quarter after good quarter. I do worry that there's a little bit of an expectations game that's going on, that people are expecting a lot of them. People are also talking about some of their expenses. A little bit higher SG&A, employment side. I don't think people understand quite what Larry Page is doing with the Other Bets part of their business.
Hill: I'm glad you mentioned that, because one of the things that they had done recently, and when they moved from being Google to Alphabet, it was to give more transparency to the overall business, and they set up these divisions, and one of them was Other Bets, and it was essentially their way of saying, "Look, to give more transparency to investors, to shareholders, to Wall Street, we're going to put over, in this one category, things that aren't search." And what they did recently was take one of these things from the Other Bets category, Nest --
Mann: And broke it out.
Hill: -- their move to the smart home, and they basically brought that back over to Google. And one of the things that we saw this quarter was that, because of the amount of money they are sinking into Nest, if you just look at the Other Bets as a category, you see that, now that Nest is no longer in there, the revenue is up, the loss is smaller -- it's still a loss, but it's smaller. So, I think, maybe people were reading a little bit more into that than they should, because again, I get that they're spending a lot of money, and certainly, when we were at South by Southwest, everything Google was doing was screaming smart home. That was their entire presence at South by Southwest.
Mann: Yeah. And they are willing to lose money on that for an extended period of time so that they are there and ready to win when the market is ready for it. You know what it reminds me of? I don't know that people think about this that much anymore. You had AT&T, and AT&T had a massive think tank called Bell Labs. And Bell Labs had its own budget. If it made profits, that was great, but it was also there to get out ahead of whatever the next trend was, get out ahead of whatever the next technology was. And Other Bets from Google is exactly the same thing. Even broader, because Bell Labs was pretty much limited to telecommunications. So, I don't know what more people wanted. I think the stock probably has had a great couple of years, so I wouldn't read anything into the fact that the stock is down a little bit. This is a company that is unlike any other on the planet.
Hill: Is it safe to assume ... I'm not going to say the next two quarters are going to look exactly like this, but it does sort of feel like, when you look at the overall business, when you hear the comments from management, it seems like, at least directionally, the expectations for the next couple of quarters is that they're going to be kind of like this. The profits will be measured in billions. The spending that they're doing around smart home-related things, not just Nest but the speaker --
Mann: Auto-drive cars.
Hill: -- all of that sort of thing, it really does seem like they're going to look and feel a lot like this one.
Mann: Yeah, I think that's true. The biggest wild card for Alphabet and all of the other big social media companies is, is there regulation coming down the pike? But, even that's not a story for the next couple of quarters, that's a few years down the road.