In brief: Google's parent company Alphabet says it's having a great third quarter, but in reality the company is taking a hit on its profits by increasing investments in various areas of potential growth, such as cloud computing. This, according to CEO Sundar Pichai, is only a temporary blip – the company sees itself as a "new entrant" that has a lot of new opportunities to create competition.
Last August, Alphabet was seen taking over Apple to become the most cash-rich company on Earth, mostly because of the latter's overseas profit repatriation and relatively high R&D spending. However, Google's parent company has posted its latest financial report, which tells a mixed story to investors.
The company reported revenues of $40.5 billion for the third quarter of 2019, a 20 percent increase over the same period of last year. However, that only tells one part of the story, as the profit failed to meet targets and analyst forecasts – it saw a sharp decline of 23 percent to almost $7.1 billion. This caused a mild drop of 2 percent in value for company shares in after-hours trading.
Naturally, most of the revenue came from Google and more specifically, from Google's advertising business, which makes up 85 percent of the total earnings. Google's "Other Revenues" segment, which includes cloud and the mobile hardware business registered $6.4 billion in revenue.
It's also worth mentioning that Alphabet's "Other Bets" category may have had a significant contribution to the decrease in overall profits, as the operating losses amount to a whopping $941 million. This includes investments in Waymo, Verily, and Google Fiber.
Between Google's antitrust battles and increased competition from other tech giants like Amazon, the company has been working to reduce its reliance on search and advertising by investing more into enterprise cloud and ambient computing, not to mention self-driving cars. As part of that strategy, Google hired 6,450 employees in the last three months alone, and now sits at a total of 114,000.
Google has to look beyond search and advertising for long-term growth opportunities, so investors aren't particularly worried about the current earnings miss. That said, the company decided not to compete for the Pentagon's cloud-computing contract valued at $10 billion, which was recently awarded to Microsoft.
Cloud computing would appear to be where the company is turning most of its efforts. On the consumer front, that translates into Google Stadia, a service that would allow people with a fast enough connection to play AAA games on mobile devices or in the living room by streaming all content in real time while rendering work takes place away on Google's datacenters.