Are Google's 'other bets' worth the money?

Alphabet Inc is now the world's most valuable company, but the bits that aren't Google are losing money fast.

by Adam Gale
Last Updated: 23 Mar 2016

Google is the world’s most valuable company, with a market capitalisation over $560bn (£400bn). Why? It can’t be its profits ($16.3bn in 2015), which are less than a third of Apple’s, or its revenues ($75bn) which are six times less than Wal-Mart’s, or indeed its dividend, which is a big fat zero (so not much less than its tax payments...).

It helps that Apple, the company it displaced at the top, lost 27% of its market capitalisation between July and February, but it’s also unfair to say Google got where it is by default. The reality is that investors value Google so highly because they believe it is the future.  

It’s not a bad call, given how synonymous it has become with the internet age, and how rapidly it has grown over the last ten years. But this is also true of Facebook and Amazon, which are currently held back from Google’s heights by relatively lower revenues and profits respectively. This situation won’t last for long. Facebook has cracked mobile, which is rapidly becoming the future of digital advertising, while Amazon has cracked the cloud, which is rapidly becoming the future of business computing.

What has Google cracked? Its business may be brilliant now, but what’s its Next Big Thing? The answer, it hopes, will be found not in Google proper but in the ‘Other Bets’ segment of parent company Alphabet. This is where it parks it driverless cars, drones and internet balloons. It’s where it fine tunes its artificial intelligence, designs the connected home (Nest), figures out how to make people live longer (Calico), builds implantables (Verily – think wearables, but under the skin) and enters the broadband market (Fiber – coming to a city near you...).

To varying degrees, these are all very futuristic. But unfortunately none of them are as yet making any serious money. Revenues for the whole ‘Other Bets’ segment were only $448m last year, resulting in a $3.6bn loss – nearly twice what it was the year before.

If this weren’t Google, investors would be condemning the company for blowing a good chunk of their profits on hair-brained schemes. They would be calling for a divi and share buybacks, not unnecessary diversification.

But it is Google. Investors buy its stock precisely because they expect it to keep on growing, and to an extent this means they expect some of the company’s crazy bets to pay off. Whether they actually will clearly remains to be seen, but it would seem unlikely all of its ideas would fall flat – particularly because they cover such diverse sectors. We may not be getting to work in a Google Car, but maybe we will talking to its AI (and losing to it at Go).

Frustration will mount if the costly ‘Other Bets’ keep failing to deliver, but in truth so long as Alphabet’s core business continues to grow profitably at the pace it has done, it’s unlikely to have too many complaints.


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