Morning Report: Alphabet’s stridently good earnings report also detailed huge expenses stemming from the holding company’s smaller companies. Here’s why that doesn’t matter.
Alphabet’s recent earnings report was welcomed by investors. The company’s shares reached record highs after the company beat profit and revenue estimates. A massive EU-sourced fine didn’t appear to slow the company down either.
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Alphabet is in good shape because Google, the search, cloud computing, and productivity company, is growing and lucrative.
That Google “print[s] money,” as TechCrunch recently put it, however, is not news. But inside of Alphabet’s most recent earnings report were new details of how much its “Other Bets” costs to operate.
Other Bets, Alphabet’s collection of future-facing and non-search projects, is small compared to Google. In the holding company’s most recent quarter, Google brought in $32.5 billion in revenue. Other bets managed just $145 million.
The firms that constitute Other Bets are expensive today and historically. Other Bets revenue in Alphabet’s year-ago Q2 came to just $97 million. That pales compared to the collection’s year-ago operating loss of $633 million. In the firm’s most recent quarter, the $145 million in Other Bets revenue was stacked against a $732 million operating loss.
Alphabet continues to spend on Other Bets despite an apparent lack of a ramp to profitability.
So while Other Bets contribute little to nothing of Alphabet’s revenue growth in some quarters, the costs associated with the efforts are comparatively high. We can calculate their impact in fact. The previously mentioned $732 million operating loss that Other Bets generated in Q2 2018 is just over a quarter of the firm’s operating income during the period.1
But there’s more to life than operating income. Despite Nest’s resumption into Google and revenues still scarce on the ground from the rest of Other Bets’ member entities, I’d wager that the work is worth it.
First, the effort is affordable. Alphabet has over $100 billion in cash, huge quarterly profits, and no dividend. That’s a position from which you can afford to invest in your own future.
Alphabet’s Waymo is very competitive in a space that is drawing huge amounts of capital from investors wagering that self-driving tech will power a huge chunk of our future economy.
Recall from our recent coverage that Zoox is raising hundreds of millions of dollars at a valuation in the billions to work on the same problem. GM is spending billions on the matter, and so is Ford. Uber spent a huge sum on the project. And that’s just some of the firms working on self-driving cars.
So, from a purely pecuniary perspective, Other Bets is a loser. But when the collective keeps putting non-financial points on the board as Waymo just did, the bets are probably just fine, so long as Google continues to print cash.
More revenue wouldn’t hurt, though.
- The operating income figure that we are using is of course fine-inclusive, meaning that the impact of Other Bets costs is magnified. But all the same, Other Bets’ losses are a material drag on Alphabet’s Google-fueled profits
From The Crunchbase Daily:
Bloom Energy, the Silicon Valley-based maker of power generators based on solid oxide fuel cell technology, raised $270 million in its IPO, pricing shares at the high end of the proposed range.
China’s two most prominent facial recognition startups, Megvii and Sensetime, are on track to raise $1.6 billion in two separate mega-funding rounds. Sensetime is reportedly nearing a $1 billion fundraise from SoftBank, while Megvii is eyeing $600 million from Alibaba and Boyu Capital.
Upwork, an online marketplace for freelance professionals, has reportedly submitted a confidential filing for a public offering. The company was formed five years ago with the merger of rival freelancer platforms ODesk and Elance.
Pinterest, the image-based social network valued at a little over $12 billion last year, is the latest famous unicorn to reportedly plan a 2019 IPO. The planned offering comes as both revenues and monthly active users continue to grow at a surprisingly fast clip, a Crunchbase News analysis finds.
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