Equities 5 minutes to read

Alphabet posts worst profit margin since 2004

Peter Garnry

Head of Equity Strategy, Saxo Bank Group

Summary:  News of a massive spending spree by Alphabet on data centres for its subsidiary Google has left its shares with a bit of a hangover as investors responded by chopping 4% off their price.


Google’s parent company, Alphabet, reported Q4 earnings last night with revenue ex-TAC (excluding traffic acquisition cost) at $31.8bn beating estimates of $31.3bn. Looking at the gross revenue number (so not taking out TAC) it came out at $39.3bn up 22% y/y while EBITDA at $10.8bn was only up 11% y/y. The Q4 2018 EBITDA margin was 27.5% which is actually the lowest in Alphabet’s history as a publically listed company and the worst since Q1 2004.

The reason for this margin squeeze is an astronomical rise in capital expenditure on datacentres related to the Google search engine, YouTube video streaming service, Waymo (autonomous car service) and cloud infrastructure. The company said in the conference call that YouTube is driving the majority of the rise in capital spending. 12-month rolling capital expenditure has gone from around $10bn in 2016 to $25bn in 2018. As a result, the free cash flow generation has declined the past two years, which is longest streak since the period 2013-2014 where Alphabet had a mild contraction in free cash flow generation. Investors were concerned over these developments sending the shares down 4% in after-market trading.
Interesting takeaways from the conference call:

Expect capital expenditure to slow down meaningfully – we are not that sure about that for 2019
Google is increasing its investments into e-gaming
Cloud business is the fastest growing business in the Alphabet group
5 million paying G Suite customers
The board has authorised $12.5bn in share buybacks

Elsewhere in equity markets

This morning the Danish jewellery company Pandora reported Q4 numbers that significantly topped estimates. Q4 EBITDA was DKK 2.8bn vs est. DKK 2.5bn and revenue also topped estimates at DKK 7.9bn. Investors have sent shares up 14% on the news.

Pandora has been a heavily shorted stock for years by US-based hedge funds in particular. If today’s earnings release reverses sentiment then Pandora’s shares could experience a short squeeze in the short-term. But for perspective, the company’s troubles are not over yet as management is guiding negative organic revenue growth of 3-7% in FY19 with likely more downside than upside risk given the weak economy in especially Asia.
Pandora shareprice the past five years. Source: Saxo Bank
Upcoming IPO

The hugely popular business collaboration platform Slack has confidentially filed for IPO in a direct listing approach similar to that of Spotify last year. Slack has all the ingredients to become a huge IPO in terms of interest and according to a previous Fortune article people close to the deal suggest a valuation at around $7bn. Little of information about the progress of the company slipped out over the years but one recent number suggests around 8 million active business users. We will follow up as soon as the company has filed its S-1 filing with the SEC.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.