Don’t Expect Alphabet Inc (GOOGL) Traffic Acquisition Costs to Come Down

Investors have to come to terms with Google’s changing operating model

Congratulations are in order for Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) investors. According to Citi Research, the company has once again surpassed Facebook Inc (NASDAQ:FB) as the most popular tech company among hedge funds. A total of 16 hedge funds now own GOOGL stock, one more than FB stock. That’s an improvement for Alphabet since the two were tied in Q1 at 13 hedge funds apiece.

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The new development is actually quite surprising, seeing how badly GOOGL stock has performed ever since the company reported Q2 numbers that beat on both the top and bottom line. The stock is down 9% since the earnings report, taking its year-to-date return to 17% compared to 45% return by FB stock.

So, what beef do GOOGL investors have with the company? Simply put: rising costs, specifically Google’s rapidly expanding traffic acquisition costs. These are payments the company makes to partners for the privilege of making its search engine the default search tool on their respective platforms. Google’s TAC hit the highest point in eight years during the last quarter after clocking in at $5.09 billion, a 27.9% increase from a year ago. TAC as a percentage of GOOGL revenue came in at 22% compared to 21% in last year’s corresponding quarter.

Rising operating costs are always a cause of concern for long-term investors because that translates to squeezed margins and thinner profits. In the case of GOOGL, though, there is a method to the madness.

Mobile Players Hogging GOOGL TAC

Mobile players such as Apple Inc. (NASDAQ:AAPL) and Samsung have been hogging most of Google’s TAC. Before the founding of Alphabet in late 2015, Google had…

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