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Alphabet Q3 - Tax Hits Profits

We are in the middle of US earnings season now, and last night Google was out with its results. The holding company is actually called Alphabet, but its share codes are GOOG and GOOGL, so I just call them Google. The company has a market value of $894 billion and was founded in September 1998 by Larry Page and Sergey Brin. Its headquarters are in Mountain View, California. Sundar Pichai has been the CEO since Oct 2015.

Google's search engine is used to find things on the internet, and its ancillary services like Chrome, Android, Drive, Maps, Calendar, Gmail, YouTube are ubiquitous on every computer and mobile phone. To consumers, these services are mostly free but companies pay Google to market their services. Their engineers are wizards at inventing, optimising and selling online advertising.

In this set of results, Google's advertising business drove Alphabet's net revenue up by 20 per cent, slightly topping Wall Street expectations. The latest figures reflected the launch of new advertising formats, as well as continued strong growth in mobile searches and YouTube. CFO Ruth Porat noted that group revenue has risen by about $25 billion over the past 12 months, to $150 billion.

Profits missed expectations though, due mainly to a huge tax settlement in France. Google's European headquarters are based in Dublin, but the French government alleged that it failed to pay its dues to the state by avoiding to declare parts of its activities in that country. The settlement comprises a fine of 500 million euros and additional taxes of 465 million euros. France has pushed hard for a revenue based digital tax to cover European Union member states, but run up against resistance from Ireland, Denmark, Sweden and Finland. Google wants to avoid that outcome, and that is probably why they settled this case.

Profits were also lowered due to a surge in costs from hiring, cloud capacity, new buildings and content spending for its YouTube subscription service. Group headcount, rose by 6 450 employees in the quarter, taking the total workforce to 114 000. At $10.12, earnings per share were down 23 per cent from the year before, and $2.25 a share below Wall Street's expectations.

The stock traded at a new all-time high yesterday in a strong market, within a whisker of $1,300 per share. They softened slightly after these results hit the wires. Let's see what they do in the normal trading session later today. Google remains a conviction buy here at Vestact, and this is a must-own in every portfolio.


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