Investor pressure, stronger dollar lead big companies to rein in their spending
SAN FRANCISCO – Technology's big-spending trio of Google, Facebook and Amazon appear to be tightening their belts — at least a notch — in a concession to cost-conscious investors and a strong dollar.
Hints of restraint were sprinkled throughout the companies' quarterly reports. Expenses at all three are still expected to rise faster than revenue this year, but Google Inc., Facebook Inc. and Amazon.com Inc. signaled that spending increases might not be as dramatic as expected. The message boosted all of their stocks, which had been in Wall Street's doghouse for their free spending.
The shift can be traced to economic turmoil in Europe and Asia that has caused the dollar's value to rise against many other currencies, said BGC Financial analyst Colin Gillis. Revenue coming in from overseas will translate into fewer dollars — potentially chopping about 4 percent off of 2015 revenue compared with 2014, Gillis estimates.
"That's a significant hit," said Gillis. "They all have massive opportunities ahead that they want to pursue, but they are also going out of their way to sound more prudent."
Amazon's moderation was the most obvious: its fourth-quarter operating expenses rose at a slower pace than analysts had anticipated. That delighted investors who have become frustrated with recurring losses driven by CEO Jeff Bezos' prolific spending on data centers, distribution centers, gadgets and drones. Amazon shares, which had hit a 52-week low after the prior earnings report in October, spiked nearly 14 percent on fourth-quarter results.
"It looks like Amazon does actually care about its stock and profits," Macquarie Securities analyst Ben Schachter wrote in a research note. Amazon earned $214 million in the fourth quarter.
The change was more about tone than the actual numbers, since spending at both Google and Facebook still accelerated in the fourth quarter. Investors initially seemed spooked but settled down after reassuring remarks from Facebook and Google executives. Since their last quarterly earnings reports in October, Google's shares had fallen 4 percent and Facebook's shares slipped 6 percent. But the day after announcing earnings last week, Google shares rose nearly 5 percent and Facebook climbed 2 percent.
Google CFO Patrick Pichette stressed that the search giant's expenses included $300 million in one-time accounting items and emphasized the company's commitment to finding "a healthy balance between growth and discipline." That balancing act prompted the company to recently suspend consumer sales of Google Glass, its Internet-connected eyewear, in an effort to design a more appealing version. Without providing specifics, Pichette promised Google will cancel other projects that "don't have the impact we had hoped for." Meanwhile, Facebook revised its 2015 budget. The social networking leader's costs may increase by as much as 70 percent this year, down from a previous ceiling of 75 percent, according to CFO David Wehner.
Google, Facebook and Amazon all spend heavily in an effort to maintain the competitive advantages they built on desktop and laptop computers as tech usage now tilts toward smartphones and tablets. The companies also splurge on expensive experiments that may never pay off but that they view as valuable research.
Google plows money into a wide range of such projects as driverless cars, lifelike robots, intelligent appliances, Internet-beaming balloons and satellites, and even a quest to discover the Fountain of Youth. CEO Larry Page justifies these "moonshots" by pointing to hugely successful products like Google's Android operating system, Chrome browser and YouTube video sites that were once viewed as ill-advised investments.
Facebook has been expanding into virtual reality and mobile messaging. Amazon.com is developing a fleet of drones to deliver packages to customers, creating its own original TV shows, while also dabbling in a variety of gadgets such as the FireStick and Fire phone aimed at making it easier for people to buy goods from its website.
"There is this group thinking where everyone is saying, 'If you aren't failing, you aren't trying hard enough,' " Macquarie's Schachter said in an interview. "Obviously, there is a lot of truth to some of these things, but from an investor point of view, it can be frustrating."