Alphabet & Snap – Q4 18.

In this business, it pays to be big.

Alphabet Q4 18 – Outside the doghouse.

• Alphabet reported good Q4 18 results, but rising costs and an increasing fear of privacy regulation has kept a lid on optimism both inside and outside of the company.
• Q4 18 revenues / adj-EPS were $31.84bn / $12.77 ahead of consensus at $31.33bn / $10.86.
• However, the EPS beat was manufactured by non-operating items as EBIT came it at $8.2bn missing consensus of $8.6bn explaining the negative reaction on the day.
• The problem is that Google is having to pay more and more of its revenues away to third parties in return for the traffic they generate and send to Google servers.
• This now amounts to 23% of revenues and is continuing to climb.
• The other culprits are R&D (which are investments in future growth) and depreciation on the heavy capex spend that Alphabet is making in data centres and its cloud business.
• Alphabet also raised the prospect of revenue risk in its annual report (10K) from privacy-related changes that it may be forced to make as a result of legislation.
• I think that this is Alphabet covering all of its bases as I see the risk from regulation being very low.
• This is because:
  • First: so far regulators have proved utterly inept at regulating the Internet (see here) and
  • Second: Facebook has been in the privacy and data abuse doghouse for over a year and there has been zero impact on its usage metrics or financial performance (see here) implying that its users simply do not care.
• Facebook is likely to be impacted by these problems long before Google is.
• Furthermore, anecdotal experiments have indicated that users have a much harder time living without Google services than Facebook making quitting much harder.
• Hence, I think Google has a steady but slower year ahead of it and will continue to be least impacted by any regulation around privacy making it a defensive play compared to some of its peers that monetise via advertising.

Snap Q4 18 – Bump along the bottom.

• Snap reported results where its user base showed stabilisation but were hardly the stuff of a healthy growth company.
• Q4 18 revenues were $389.5m compared to consensus at $377.5m with 186m daily active users broadly flat both YoY and QoQ.
• However, the company still lost $0.14 per share and burned through $126m of its reserves which now stand at $1.3bn giving it time to reach profitability.
• The shares had a relief rally on the revelation that things had not gotten any worse, but they don’t seem to be getting much better either.
• 2019 is a year where growth will be hard to come by meaning that unless the company cuts costs, it will never make any money.
• This outlook is pretty bleak and fails to justify the $10bn market cap that the company still commands.
• I see no reason to get involved in what has become a very volatile, penny stock.