Amazon and Alphabet are spending heavily while growth slows

The growth engines of Amazon.com and Alphabet, the world’s largest internet companies, sputtered last quarter, and after weeks of stock market jitters, investors were in no mood to give them a pass.

Amazon, the biggest online retailer, reported a second consecutive quarter of sales that fell short of estimates – the first back-to-back revenue miss in almost four years. The company on Thursday also gave a disappointing revenue and profit forecast for the busy holiday period, sending shares down as much as 9.4 percent in extended trading. Even its highly profitable cloud-computing business, Amazon Web Services, didn’t grow as fast as it had in the previous three months.

Alphabet’s third-quarter sales missed analysts’ expectations and revenue growth from its main Google sites, including Search and YouTube, came in at 22 percent, slower than the prior period. Shares of the world’s largest digital advertiser dropped 3.9 percent after the results were announced.

In a time of low interest rates, Amazon and Google have offered investors the chance to hitch a ride on the fast-growing e-commerce, digital advertising and cloud-computing markets buoyed by a steady global economy. Amazon shares have roughly tripled in the past three years, while Alphabet is up more than 50 percent.

Now interest rates are rising, giving investors other options to generate returns, while clouding the outlook for the economy. Add in the recent stock market rout, and the tech companies had little room to bobble their results.

“Given the current market backdrop, your earnings report has to be perfect or your stock will get punished,” said Vic Anthony, an analyst at Aegis Capital Corp.

The environment is more worrying than a quarter or two of missed revenue numbers. After years of rapid growth, the share of Americans who go online, use social media or own mobile devices has plateaued in the past two years, according to a September analysis of Pew Research Center data.

In response, US internet giants are spending heavily in search of new sources of growth.

Amazon’s operating expenses rose 22 percent to $52.9 billion in the quarter. It’s investing in cloud data centers, voice-based computing devices, and international growth in countries like India.

Capital expenditures at Alphabet hit $5.28 billion, up 49 percent from a year earlier. The company is spending billions of dollars a year to build data centers, while chasing Amazon in the cloud and developing and marketing new consumer hardware like its Pixel phones.

Both companies posted brisk growth in their cloud units, but lagged behind No. 2 provider Microsoft, which on Wednesday beat the Street’s sales expectations on a 76 percent jump in revenue from its cloud-computing services.

While Amazon and Alphabet are spending, Intel has been one beneficiary. The world’s second-largest chipmaker gave forecasts on Thursday that put it on course to top estimates and said it will have a record 2018 helped by a continuing surge in purchases of new equipment by data-center operators. Its server unit reported revenue of more than $6 billion for the first time, a gain of 26 percent from a year earlier. The shares edged up less than 1 percent in extended trading.

Now read: Intel forecasts increased revenue due to PC demand

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Amazon and Alphabet are spending heavily while growth slows