The 1 Question Alphabet Investors Need to Ask Themselves Today

Alphabet (GOOGL -1.97%) (GOOG -1.96%) reported its fourth-quarter results on Tuesday, and despite beating expectations on profits and revenues, the share price dipped a few percentage points. But the decline wasn't due to that favorite bogeyman of Wall Street, a weak outlook. No, what seems to have worried investors a bit was the company's heavily increased spending and a decline in advertising rates. But neither of those things disturb MarketFoolery host Chris Hill or senior analyst Emily Flippen.

In this segment of the podcast, they discuss their views on Alphabet, CFO Ruth Porat's reputation, the slow monetization of YouTube, the company's pattern of investment in long- term growth, and more.

A full transcript follows the video.

Check out the latest Alphabet earnings call transcript.

This video was recorded on Feb. 5, 2019.

Chris Hill: Let's talk about Alphabet. Fourth quarter profits came in higher than expected. Overall revenue, which I should point out was just north of $39 billion --

Emily Flippen: Just a little bit.

Hill: -- also came in higher than expected. The stock is down 3%, 4% today. I'm assuming at least part of this has to do with the spending that's going on at Google.

Flippen: Oh, yeah! They beat estimates for all intents and purposes, but operating profits were marginally lower than I think expectations were. That concern came from a doubling in capex year over year. A lot of people thought, "Man, Google's spending a lot of money to reach these growth targets. Is that going to be sustainable in the future?" It's a big fish, whether or not people call it that.

I think it's important for Google to make good use of the money that it does generate. And while the stock's down a little bit, I think analysts might look at this and think, "Yeah, it's necessary." A lot of these areas in which Google is trying to compete require a lot of capex. Look at them in the cloud business, they're significantly behind Microsoft, for example. They need to catch up. That's going to require a lot of capital. So, as an investor, I'm not too sure. I like to see good earnings. Regardless of the market's irrational response, I think it was a good quarter for them.

Hill: It was a good quarter. Advertising rates coming down, I think that's probably also a point of concern. But it seems like we've seen that before in Alphabet's past. To go back to the amount of money that they're spending, I'm a little surprised only in this regard: Ruth Porat, the chief financial officer, has earned tremendous respect from so many corners. And rightfully so. And I look at the sell-off today, and I can't help but feel that there's just a little bit of doubting of Ruth Porat baked into that. Maybe I'm reading too much into that, but I look at her and go, you know, I trust her 100%. I don't own this stock, but I think that if you're going to question the amount of money that Alphabet is investing, then inherent in that is questioning the wisdom of Ruth Porat. And I...

Flippen: You're not in the business of questioning?

Hill: [laughs] I'm not in business of questioning Ruth Porat. She's one of the best CFOs out there. I just think, if anyone had Alphabet on their watch list yesterday, well, good news. Today, you can buy it for 4% less.

Flippen: A little bit of a discount. I think some of that might have already been made up in the market as people did take advantage of that short-term drop. To address the ad revenue, ad revenue is still growing faster than their traffic acquisition costs. That's what's really important. Some of these concerns, when you put them in the larger context... I mean, of course I'm concerned about Google competing in the cloud space, but a lot of the money that they're spending is also being turned back into YouTube, for example, which is an amazing platform that Google is just getting into realizing the true potential of. So, I'm not concerned. I like to see it when a company is a good investor. And Google, up and to this point, has been a great investor! The important thing to me is that they're investing for the purposes of future growth, and that the investments that they're making today are not going to potentially harm the company in the future, and nothing Google is doing today leads me to believe that.

Hill: I'm glad you mentioned YouTube. It's really pretty amazing, when you look at all of the businesses under the Alphabet umbrella, you look at YouTube, how big it is, how dominant it is, how much time is spent on that platform. As an investor, you step back -- I think it's fair to say that the people at Alphabet themselves are not satisfied with the business of YouTube. They look at YouTube as something they can improve on. So, the idea that they're somewhere between only scratching the surface of YouTube's potential and fully realizing its potential, it's pretty mind-blowing.

Flippen: Yeah. YouTube, it's not grown without its challenges. A lot of that comes from the roots of YouTube, the way that YouTube is monetized. Inherently, you're looking at what has grown into celebrities developing on this platform. So, obviously, it's a platform that's demanding not only a lot of ad revenue, but a lot of viewer hours watched. So, it's important for them that they monetize it, but not to the point where it potentially harms the platform that it's grown into. It'll be interesting to see how this develops. I do think that developing YouTube and all of their other initiatives are going to require a lot of capital. To me, as an investor, if they're making good returns on that capital, I'm not worried.