Public Markets

Here Is How Far Alphabet Has Improved The Financial Performance Of Its “Other Bets”

After the bell today, Alphabet reported its second quarter financial performance. The company, parent to the search juggernaut Google, reported $26.01 billion in revenue, up 21 percent from the year-ago quarter, and over $5 in per-share profit on a GAAP basis, ahead of expectations.

Shares in the firm fell after the top-and-bottom beat. The company could be off due to profit taking, after a run in its shares, or perhaps one or two of the company’s core metrics — cost per click, revenue excluding traffic acquisition costs, and so forth — fell short of expectations.

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But one group that might not have contributed to Alphabet’s after-hours fall are the so-called “Other Bets.” Other Bets at Alphabet cover a lot of ground, from self-driving cars to venture capital. Other bets are what separate Alphabet from Google; more precisely, Google plus Other Bets equals Alphabet.

Other Bets lose a lot of money. In this case, it’s no sin. Alphabet essentially takes a portion of Google’s operating income and spends it on new projects that may or may not turn into something critical later on. The firm is not alone in having a farm team of new products. Microsoft has long spent on basic research that helped lead to new technologies, like the Kinect sensor, and so forth. But what is notable about Alphabet is that Other Bets has its own profit and loss statement.

That means we can chart the performance of Other Bets over time. So we did.

Other Bets, Current Deficits

I doubt there is any serious person who thinks that Alphabet wants Other Bets to be profitable today. To get the group of companies to that point would require so dramatically slashing their operating purview as to either gut them into frailty or dissolution.

So Alphabet is willing to grow Other Bets revenue over time while accepting operating losses along the way. But no company wants to lose money. Alphabet, bearing that fact in mind, has worked to lessen the losses that Other Bets’ create.

The collection of entities remains nowhere close to profitability, but the numbers are looking up some. Here’s Other Bets’ revenue and operating losses over time:

There are few notable trends at play. First, Other Bets set fire to small hills’ of cash in the fourth quarter of every year. Additionally, the collective has managed to grow its revenue over the past few quarters while, in the most recent, posting its smallest operating loss at least since the third quarter of 2015 (the furthest back that we charted).

As you can imagine, Other Bets are becoming increasingly — if still materially moderate — revenue accretive and decreasingly bad for operating income. And that must mean improving margins, right?

It does, as you can see below:

The final result there is just a nibble over negative 300 percent. Remind yourself that this is just fine; Google is profitable as heck, and Alphabet has oodles of cash and rivers of cash flow. Still, more revenue and smaller losses are to be encouraged.

So there’s the saga of Other Bets over the past ten quarters or so. The question now becomes this: with its ability to drive Other Bets’ negative margin down (towards zero) now proven, how far does the company take it before it is cutting too close to the bone?

iStockPhoto / Nicolas McComber

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