This quarter has been one where most technology giants have delivered mixed results. Google’s parent, Alphabet (Nasdaq: GOOG), is no exception. Its recently reported third quarter revenues outpace market estimates, but continued investments in its cloud strategy resulted in a lower than expected earnings result. The market wasn’t too pleased, and the stock fell 1% in the after-hours session.
Alphabet’s third quarter revenues grew 21% over the year to $40.499 billion, missing the market’s forecast of $40.3 billion. EPS of $10.12 was, however, lower than the Street’s forecast of $12.28. The lower earnings were attributed to its increased investments in cloud computing, AI, and consumer products. Google ended the quarter with 114,000 employees, adding 20,000 employees over the year and 6,400 during the quarter.
By segment, revenues from Google properties grew 19% over the year to $28.65 billion, ahead of the market’s forecast of $28.41 billion. Its traffic acquisition costs (TAC) rose 14% to $7.49 billion, compared with the analyst forecast of $7.48 billion. Overall, Google ad revenue grew 17% to $33.9 billion. Adjusting for TAC, Google reported net revenues of $33 billion, ahead of the predicted net revenues of $32.75 billion. Google’s Other revenue, which includes hardware and cloud products, grew 39% to $6.43 billion and revenues from Other Bets grew marginally to $155 million.
Alphabet’s Fitbit Acquisition
The market is abuzz with the news that Alphabet is bidding to acquire smartwatch maker Fitbit. According to a Tech Navio report, the global smartwatch market is estimated to grow to $18.43 billion by the year 2023. At present, the smartwatch market is dominated by Apple and Samsung. According to Counterpoint Research, Apple accounted for 35.8% of the global smartwatch market in Q1 this year. Samsung came in a distant second with 11.1% share, followed by imoo at 9.2%. Fitbit was the fourth largest vendor with 5.5% global market share. If Google were to acquire Fitbit, it would get a foot in the door.
This is not the first attempt that Google has made in the smartwatch space. Earlier this year, it had acquired smartwatch technology intellectual property rights from another watch maker, Fossil, for an estimated $40 million. Fossil’s smartwatches account for a very modest 2.5% of the global market and has seen market share fall from 3.2% last year. Fitbit, on the other hand, saw its market share grow from 3.7% to 5.5% this year.
But it is not just the wearable technology that Fitbit will bring to the table. Fitbit also has extensive contracts with insurance providers to help subscribers improve their health. Recently, it had entered into an agreement with Bristol-Myers Squibb and Pfizer to build technology that can help detect atrial fibrillation within users. It also offers a subscription service for users to help them track their health and fitness goals.
Google has not announced the bid price for Fitbit. Besides hardware, Fitbit will be able to offer significant insight into the fitness market. Google has not disclosed details on what it plans to do with the technology if the acquisition were to go through. It will be interesting to see how the drama unfolds in the next few weeks.
Google’s Cloud Growth
Meanwhile, Google continues to push forward on its Cloud initiative. During the quarter, Google tripled its cloud sales force. It recently announced plans to launch its seventh US cloud region in Nevada in 2020. It is also opening a seventh European region in Poland. In the second quarter of the year, Google had disclosed that it was generating $8 billion in annual revenues from its Cloud business. It did not update those figures in the recent results, but it said that it continued to see strong momentum. It has been upgrading the service through product and partner enhancements.
Last quarter, Google had entered into a strategic tie-up with VMWare to enable customers to run VMware workload on GCP. It is also seeing synergies between the Cloud and its GSuite offerings with several G Suite customers having GCP conversations and vice versa. The investments are hurting margins and earnings in the short run, but they will play out in Google’s favor in the longer term.
Its stock is trading at $1,262.62 with a market capitalization of $874.5 billion. Earlier this week, it had touched a record high of $1299.31. Last December, Alphabet’s stock had fallen to a 52-week low of $970.11.