: Google made a lot more profit, and spent a LOT more money—here’s why

Alphabet Inc. reported a huge swing in profit and spending Monday, with earnings jumping more than 70% in the first quarter and capital expenditures nearly tripling from the year before.

In typical Alphabet GOOGL, -0.33% GOOG, -0.51%  fashion, executives on the earnings call late Monday did not offer much in the way of detail, but what they said in their reports and statements help to see the reason for the big changes. Earnings jumped because a change in accounting rules forced the company to recognize the rough value of its stake in the ride-hailing giant Uber Technologies Inc., and spending was hit by a fancy new building and ambitious infrastructure projects.

Alphabet class A stock gained immediately after the report was released, but was down a fraction in the extended session after closing down less than 1% during regular trading. Shares have gained 2% this year, as the benchmark S&P 500 index SPX, +0.01%  has declined less than 1%.

The Google parent company’s stake in Uber—purchased for about $377 million in 2013—appears to be worth about $3 billion, according to Monday’s report and some calculations from Barclays analyst Ross Sandler. The gains have to be recognized as profit as they appeared Monday in the income and other expenses line item, along with gains from other privately held stock the company owns.

While Alphabet undoubtedly holds stock in other private companies through its venture capital arm GV, the Uber stake is likely the most valuable. Overall, the changes stemming from the accounting shift added $3.40 to the company’s per-share earnings, leading to a huge beat on profit even though the gains are not actually in Alphabet’s possession yet.

Read more about the changes to Alphabet’s earnings

“The majority of these are unrealized and not actually monetized by Alphabet,” said Chief Financial Officer Ruth Porat on the earnings call, in which questions on the stake were mostly referred back to the earnings release. “They’re accrued, but not paid until an exit event occurs.”

While companies such as Amazon.com Inc. AMZN, -0.63%   are notorious for capital expenditure spending, Alphabet could make even Amazon jealous with $7.3 billion in such spending in the first quarter. A year earlier, Alphabet spent $2.5 billion on capital expenditures, and the company spent $4.3 billion in the fourth quarter, so it was a big jump.

Porat pointed out two large expenditures that were included in that total: Google’s purchase of New York’s Chelsea Market, and efforts to build new undersea cable deployments. Even without the Chelsea Market purchase, which has an actual price tag of $2.4 billion, the company still nearly doubled its capital expenditures. Most of the spending was the Google unit, and its Other Bets category actually decreased its capital expenditure spending compared with the year-earlier quarter.

Porat and Chief Executive Sundar Pichai spoke in broad strokes about what the billions went toward, rattling off a list of items that included machine learning computing power, data center build-outs and office facilities. Pressed on the call with analysts for details on why the company’s capital expenditures rose and how the company deployed the funds, they said the company prefers to buy rather than lease and that Google’s costs related to building out artificial-intelligence technologies.

“I think more to your question with respect to technical infrastructure, that reflects investments in compute power to support growth that we see across Google, and the largest component is on machines,” Porat said. “It’s also on data centers and undersea cables. On machines, the biggest contributor is the demand that we’re seeing. So in particular, it’s the expanding application of machine learning efforts across Alphabet, plus the requirements for cloud and search and YouTube and then, secondarily, the increased cost of newer technologies, CPUs, memory, network.”

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Porat’s statement generated more questions than it answered for some observers.

“It seems like there are a lot more costs going into the overall business,” Forrester analyst Collin Colburn said. “It would useful to have more clarity: Where are they going? What are the major initiatives that they are looking at?”

The profit bump from the Uber investment was a one-time gain, but without that clarity, it is hard to know whether to expect Google’s big spending on capital expenditures to continue.

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