Ali Mogharabi: Alphabet reported better than expected fourth-quarter revenue as the firm continues to grow its advertising business impressively. Similar to Facebook, Alphabet is further monetizing its users and attracting more ad dollars to not only its search but also its YouTube video platform, demonstrating the firm's strong network effect moat source. While Alphabet's operating margin was in line with our internal projection, it was slightly below the consensus. We expect the firm to continue its investments to stay ahead when it comes to innovative tools not just for consumers, but also for advertisers and enterprises, further pressuring margins in 2019.
We look for Alphabet to continue to dominate the online search market, which drives consistent double-digit, top-line growth. While Google is facing more competition from Amazon, we note it is also further investing in making its search and display ad platform more dynamic and easier to use.
We expect revenues from YouTube to drive further growth in Google's top-line. We also remain confident that Google will continue to make progress toward becoming the world's third largest cloud provider.
We are aware that investments to spur growth in YouTube, cloud, and hardware revenue have pressured Alphabet's gross and operating margin. However, there are a couple of reasons why we think margin expansion could resurface in 2020.
First, on the gross margin front, growth in traffic acquisition cost is no longer outpacing ad revenue growth as it did for five straight quarters before turning around in third-quarter 2018.
And second, we expect sales and marketing expenses as a percentage of revenue to begin to decline slightly in 2020 as Google's cloud offering gains a stronger foothold in that market, slowing down headcount growth in the firm's cloud sales. Plus, as Google's YouTube benefits further from the firm's network effect moat source, we expect less sales and marketing spending on YouTube, which could create some operating leverage beginning in 2020.