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When Will Alphabet’s ‘Other Bets’ Become ‘Other Businesses’?

July 28, 2016, 10:59 PM UTC
A self-driving car traverses a parking lot at Google's headquarters in Mountain View, California on January 8, 2015. AFP PHOTO/NOAH BERGER / AFP / Noah Berger (Photo credit should read NOAH BERGER/AFP/Getty Images)
Photograph by Noah Berger—AFP via Getty Images

How many companies can get away with spending $859 million to produce just $185 million in revenue? Not only that, but how many can do it and have investors celebrate it as progress?

There is only one I’m aware of—Alphabet(GOOG). One year since Google re-organized itself as a portfolio of moonshots attached to a giant, money-printing advertising business, we have a better picture of just how much money the company is spending on things like self-driving cars and Internet balloons. (The answer: A lot.)

Under Alphabet, there is a wildly profitable advertising business, and there is a money-losing unit called “Other Bets.” In the second quarter, Alphabet’s advertising business delivered $7 billion in profits on $21 billion in revenue, a strong 21% uptick from the year prior.

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Revenue for the much smaller Other Bets also jumped, by 150% to $185 million. But the unit’s heavy losses also grew by 30% to $859 million.

Investors were fine with it. Shares of Alphabet were up nearly 6% in after hours trading.

CFO Ruth Porat’s legacy will rest on her ability to whip Google’s roller-blading, money-burning Other Bets into profitable businesses. There is a sign in the offices of X, the company’s moonshot factory, depicting a burning $100 bill with the caption, “Investors think we do this,” according to a recent New York Times profile of the unit. Regardless of the sign’s origin, it represents the thinking Porat has brought to the business.

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On an investor call Thursday, Porat emphasized the long term while acting responsibly in the short term. “Our focus on long term revenue growth does not give us a pass on managing expenses,” she said. “We invest a lot of time and effort in assessing how to manage for long term growth.”

Investors love this kind of discipline—except when the headlines aren’t so great, and Porat doesn’t share much beyond her prepared remarks. Last quarter, investors asked about troubles with smart thermostat company Nest, one of the Other Bets that Google is hoping will become profitable. Porat’s response was less than satisfying.

So far, the only moonshots making any money for Alphabet are Nest, health care company Verily, and its high speed internet unit Fiber, which the company intends to invest lots more money into. Because of how small and unpredictable the Other Bets category can be, Porat cautioned the quarterly numbers would be “lumpy.” In other words, yes, Alphabet intends to make its moonshots into real businesses. Just not tomorrow.