Google (OK, Alphabet) passes Apple, becomes world’s most valuable company

There was always a sense of inevitability about today’s headline news that Google (OK, now Alphabet) has become the world’s most valuable company. A few years back in Omaha, Berkshire Hathaway chairman Warren Buffett told AGM attendees he couldn’t find any weaknesses in Google’s business model. He stopped short of buying the shares himself, but hordes of investors worldwide took his advice to have another close look. After just a cursory glance, they would have discovered the seemingly unstoppable and exponential power of the world’s dominant search engine business. Whether Google, sorry Alphabet, has found another winner in driverless cars is still a moot point – but investors liked the news released about the “moonshot” project yesterday enough to give the shares a 6% lift which will take its total market value past tech rival Apple. We own 15% stakes in both stocks in the Biznews Global share portfolio. We’d suggest you also grab a slice of this particular action. – Alec Hogg       

Alphabet, the holding company for Google, looks set to become the world’s most valuable company when stock market trading begins on Tuesday, following the revelation that it poured $3.6bn last year into “moonshot” projects such as driverless cars.

A surge in mobile advertising in the final months of last year, along with the first insight into the full costs of side bets designed to cement the Alphabet’s long-term leadership in the tech world, extended Wall Street’s recent enthusiasm for the company’s stock.

Alphabet’s shares rose more than 6 per cent in after-market trading on Monday, pointing to a market capitalisation of about $550bn, topping Apple’s $540bn. It had already overtaken Apple measured by enterprise value, after stripping out both companies’ net cash, though market capitalisation remains a more widely followed yardstick.

Alphabet corporate structure

The change in tech leadership pointed to a new milestone in the maturing smartphone world, as purchases of new devices slow and the fortunes of companies that benefit from selling advertising or services to the new mass mobile market boom. Apple is facing its first fall in iPhone sales, while Google and Facebook, which also reported an unexpected boom in mobile advertising last week, have been able to cash in.

The losses of $3.6bn from what Alphabet calls its “other bets” was in the middle of the range of most Wall Street analysts’ expectations, and came on revenues of only $448m. However, it represented a jump from $1.9bn the year before. Ruth Porat, chief financial officer, said the numbers were likely to be volatile given the early-stage nature of many of the businesses.

Ms Porat, who joined from Morgan Stanley last year, has been cheered by Wall Street for reining in expenses. On Monday, she said that Alphabet had made some “tough calls” as it tried to prioritise its spending on the moonshot projects most likely to bring long-term returns, though she did not give details of any ventures that had been cut or scaled back.

Losses rise at other Alphabet units

Investors had long been worried about the risk of uncontrolled spending by Google on new projects outside its core internet operation, though the promise to disclose the figures separately and last year’s announcement of the company’s first stock buyback have calmed the fears.

After peeling away the costs of its side bets, Alphabet demonstrated an improving profit margin in its core internet business, adding to Wall Street’s recent revival of confidence in the prospects for the search business.

Read also: Bloomberg View: Google, Ford partnership – blockbuster disruptive alliance

Alphabet’s profits rose to $4.9bn from $4.7bn in the same three-month period in 2014. Sales, excluding the costs of acquiring traffic, jumped to $17.3bn from $14.5bn on the same basis. Analysts were expecting revenues before traffic acquisition costs of $16.9bn.

Adjusted profits, which exclude certain items, came in at $8.67 a share, easily topping Wall Street estimates of $8.08 a share.

The Google division, which accounted for 99.3 per cent of revenues in the fourth quarter, reported an 18 per cent increase in sales in the fourth quarter on a year-on-year basis, as advertising sales, the company’s biggest source of revenue, rose 17 per cent. Operating income climbed to $6.8bn from $5.2bn in the same period in 2014.

Meanwhile, the “other bets” units generated sales of $151m in the fourth quarter, but logged an operating loss of $1.2bn. That compares to revenues of $106m and a loss of $634m in the final three months of 2014.

(c) 2016 The Financial Times Ltd.

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