Google’s parent company Alphabet (NASDAQ:GOOG) does much more than search. It has a fast-growing presence across the enterprise cloud, Google Drive storage, YouTube, Google suite applications: from Gmail to Chrome, and Docs, Sheets, and Slides. But did you know Google also has an Other Bets segment that’s engaged in diverse areas that range from fighting diseases such as Dengue by breeding modified mosquitoes, to developing self-driving cars? Should you buy Alphabet stock for its contribution to solving Dengue? Here’s a contrarian view. We say you should!
Markets See Google’s Other Bets As An Expensive Hobby, But Upside Could Be High
Google’s Other Bets segment primarily consists of higher-risk, earlier stage technologies that are quite different from the company’s core Internet business. The segment includes companies such as Google Ventures (the company’s venture capital arm), Google X (an incubator for moonshot projects), and spin-off companies that include Access (which offers super-high-speed broadband), Calico, and Verily (life sciences), and Waymo (driverless cars) among others. The segment recorded Revenues of just $659 million in 2019 and posted an Operating Loss of a whopping $4.8 billion last year. Cumulative losses over the last three years alone stand at close to $11 billion. The markets have penalized Google for allocating too much capital to these money-losing projects. For perspective, Google trades at 31x trailing earnings, versus about 36x for Microsoft (NASDAQ:MSFT) and 39x for Apple (NASDAQ:AAPL), despite the fact that Google’s Revenue Growth rate over the last two years was about 1.5x Microsoft’s and over 3x Apple’s. (Apple’s Stock Up 200%, Compared to Google Which Is Up 50%. Does This Make Sense?)
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While the traditional view of the present value of future cash flow analysis would suggest these projects are too risky, we believe the very presence of projects like these, become a compass for the company. Such projects present upside in a world where asking seemingly wacky questions and then putting money into finding answers might be the only sane path forward. More practically, we believe that moonshot projects, particularly in areas such as healthcare, could serve as a counterbalance to the gravity of regulatory scrutiny and antitrust probes that Google increasingly faces. Finally, Google does have a history of growing beyond search. Products such as YouTube, Chrome, and Android which started off small are now becoming key to powering Google’s ad machine. Similarly, Google Cloud has emerged as one of the fastest-growing players in the cloud space.
If Google is able to monetize a couple of key technologies from the Other Bets segment, it could significantly change the narrative around how investors view the segment. For example, Waymo – the self-driving car start-up, only ranks behind Tesla in the self-driving race. As Waymo evolves, it has the potential to challenge ride-sharing players such as Uber and Lyft in the robo taxi space. (related: How Does Waymo Compare With Tesla In Self-Driving) Similarly, Verily’s work on mosquito-borne illnesses also appears to be bearing fruit.  As investors see proof points from the business, it’s quite possible that they could rethink Google’s valuation.
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- A Google Plan to Wipe Out Mosquitoes Appears to Be Working, Bloomberg, April 2020 [↩]