How Have Alphabet’s Other Bets Fared In 2017?
Google’s parent company Alphabet (NASDAQ:GOOG, GOOG) saw its stock price hit an all-time high recently. Over the past three quarters, Alphabet’s revenues have grown by 22% to $78.65 billion, largely due to Google’s advertising business. However, Alphabet has been trying to expand beyond Google’s core search and advertising businesses with its ‘Other Bets’ businesses, which are trying to tackle some relevant but difficult questions.
Other Bets include businesses such as Fiber, Verily, Calico, Nest, self-driving car vertical Waymo, and some other businesses. Most of these businesses entail high risk, but with the possibility of a very high return. However, these bets have had little material impact to Alphabet’s top line of late, while putting pressure on the bottom line. Nevertheless, these businesses are reporting growth and do provide some significant long-term growth potential.
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Revenues Are Growing At Other Bets, But Still Bleeding Cash
Other Bets revenues have grown steadily in the past two years. For the first nine months of the year, these revenues have grown by 45% to $794 million and are on pace to exceed $1 billion in 2017. While Alphabet does not disclose the revenue breakdown for different businesses under the Other Bets umbrella, we believe that most of the revenue came from Nest, Fiber, and Verily, as most of the other businesses are still in the development stage. Considering that these businesses can potentially revolutionize the industries in which they operate, these revenues could be significantly higher in the coming years.
Despite the growth in revenues, these businesses continue to lose money. In the first three quarters of 2017, these businesses have reported over $2.44 billion in operating losses, while Google’s operating profit rose by 20% to over $24.1 billion.
Considering the cash bleed, the company had lowered the investment outlay for some of these businesses, notably pausing the expansion of its Fiber business in Q3’16. As a result, the CapEx for the other bets fell by 45% to $398 million in the first three quarters of 2017. Nevertheless, the company did report key business wins across Verily, Calico, Nest and Waymo, which should help the company report higher cash flows in the coming quarters.
Our $915 price estimate for Google is slightly below the current market price.
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