Amazon and Alphabet: Don’t fear the big tech spending spree...yet

 
Arjun Kharpal
Germany Is Amazon's Second Biggest Market
Will the spending spree pay off for investors? (Source: Getty)

Tech earnings dominated the agenda last week, and one theme ran through the major reports: the rise in spending from the giants.

Google parent Alphabet reported a 28 per cent increase in traffic acquisition costs (TAC), a key metric that relates to how much the company pays to draw people to its various properties. This rise in cost was enough to send Alphabet shares down sharply in after-hours trade on Monday last week.

Amazon was a similar story. Its second-quarter earnings came in at 40 cents per share versus the $1.42 per share expected, mainly because the ecommerce giant had boosted investment. Spending on technology and content, for example, rose 43 per cent year-on-year in the quarter. Amazon shares also fell after-hours.

Facebook, on the other hand, reduced its forecast for its spending increase, which excited investors.

To me, the share price falls looked like a chance for investors to take profit on some tech stocks that have seen a stunning rally this year.

There’s definitely some concern that costs could spiral out of control without any substantial return on profit. But if you look at the specific areas companies are investing in, it should be a positive in the long run.

Take Alphabet, for example. The higher TAC came as a result of more search coming from mobile. That’s a great sign that Google is diversifying beyond desktop.

On top of that, the company saw its operating loss narrow in its “other bets” segment (this includes “moonshot” projects like driverless cars) which shows some financial discipline from Alphabet.

Amazon, meanwhile, is trying to dominate every sector under the sun, from web content to food, shown by its near $14bn acquisition of Whole Foods.

It was a bold move, one that should raise some eyebrows from investors, but also show the company’s ambition. And spending is something that Amazon has convinced investors is a positive.

“As investors, everyone knows that Amazon really doesn’t care about the bottom line,” Michael Yoshikami, founder of Destination Wealth Management, told CNBC last week. And this is a good way to see a lot of these tech businesses.

“What you’re buying it for is top-line growth, revenue growth, market share — and I suspect when you go through the numbers you’re going to see Amazon is making great progress,” he says.

And this seems to ring true. Amazon has grown revenue even as it invests more, while it’s grabbing market share in a bunch of different product segments.

Alphabet, meanwhile, saw advertising revenues grow, and it continues to report good momentum in its nascent cloud business. And Netflix, which has pledged to spend $6bn on content this year, has seen a return with the fact that it added 5.2m total memberships in the second quarter.

So far, the spending spree is paying off. But that doesn't mean investors should take their eye off spending. Because if costs rise but companies’ key metrics don’t, that could spell trouble for the biggest tech firms.

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