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Alphabet Inc.'s strong earnings growth is partly explained by the significant gains generated by the investments, not the money it spends on its own business.
Alphabet
GOOG, + 1.74%
GOOGL, + 1.10%
GOOGL, + 1.10%
reported better than expected results second quarter, after taking into account the huge antitrust fine that Google paid to the European Union, and sent shares to records. Excluding the fine, Alphabet's earnings would have been $ 11.75 per share, well above the analysts consensus estimate of $ 9.64 per share, according to FactSet.
This significant gap between expectations and results is mainly due to gains of $ 1.06 billion in securities, as Google's parent company continues to account for increases in its external investments under the new accounting rules. . Alphabet executives were not asked about earnings during a conference call Monday afternoon with analysts, who did not seem interested in the $ 1 billion in additional net income.
Earnings Watch: 35% of the 500 S & P companies should report in a crazy week
"It's a way to account for existing investments in books," explained Ron Josey, analyst of JMP Securities.
"Honestly, I think most of us are just pushing back those articles and / or focusing on operating profit," said Colin Sebastian, an analyst with Robert W. Baird. & Co., in an email.
Sebastian, who attributes an outperformance to Alphabet, notes that the accounting change adds a profit of $ 1.17 to his profits, the majority of the pace, and uses this figure to adjust Google's earnings to $ 10.58 per action in a ticket to customers.
Google's investment gains, however, should not be removed or ignored. According to Crunchbase News, Alphabet was the most active and largest investor in the technology sector in 2017, surpassing both SoftBank Group Corp.
9984, + 1.40%
from Japan and Intel Corp.
INTC, + 0.77%
Intel Capital.
The early investments of Google's GV and CapitalG investment lines are starting to bear fruit, both in terms of initial public offerings and acquisitions. Since January, 20 companies backed by Google have had liquidity events according to Crunchbase data; Alphabet declined to comment on the gain or its investments, including disclosure of the major components of earnings.
During the quarter, Alphabet reported Monday, an investment, Glassdoor Inc., was sold for $ 1.2. billion to a Japanese human resources company called Recruit Holdings, while another, the DocuSign electronic signature company
DOCU, + 6.36%
had a strong IPO in which GV sold approximately 412,000 shares and retained approximately 1.46 million more shares. Two security investments also paid off, as the Evident.io cloud security company, funded by the Central Intelligence Agency, was acquired by Palo Alto Networks Inc.
PANW, -1.13%
and Zscaler Inc.
ZS, + 4.00%
became public in the first quarter. Beyond purely technological board games, Google's venture capitalists have also invested in a handful of biotech and healthcare companies, at least three of which have been acquired or made public in the past three months.
. billion in the first quarter, when the company began to follow the new accounting rules, thanks to a new stake of Uber Technologies Inc. collected in the Waymo lawsuit, among other gains. With the $ 1 billion more revealed on Monday, total earnings for Alphabet investments in the first half of the year account for nearly a third of Google's net GAAP revenue. for this period.
This is too much of the profit of Alphabet, and too much money, for investors to ignore it. For bulls, the money that Alphabet could achieve by selling investments in the future is another strong point in their favor, while the bears can say that profits are backed up by gains in earnings. important paper that may never materialize. In one way or another, Alphabet investments should start attracting more attention as they increase Google's profitability.
Alphabet stocks surged Monday at after-hours prices that would be record if they occurred in regular trade. Class A shares are already up 15% since the beginning of the year, compared to the S & P 500 index
SPX, + 0.18%
up nearly 5% in 2018.
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