Google 'moonshots' increasingly expensive

Starry-eyed projects like driverless cars, wearables and connectivity balloons carry hefty tab

google car mountain view
Credit: Google

When Google parent company Alphabet Inc. reported yesterday that its first-quarter earnings didn't hit Wall Street's expectations, execs laid the blame directly at the feet of the company's so-called moonshot projects.

Yep, those sometimes seemingly out-there projects, like autonomous cars, high-tech medical devices, smart clothes and smart home devices are interesting -- but they're not cheap.

And that's dragging down Alphabet's financials.

Google reported that its first-quarter revenue came in at $20.26 billion; the company is still making money. However, that was about $120 million less than expected.

"Our Q1 results represent a tremendous start to the year with 17% revenue growth year on year and 23% growth on a constant currency basis," said Ruth Porat, chief financial officer of Alphabet, in a written statement. "We're thoughtfully pursuing big bets and building exciting new technologies, in Google and our Other Bets, that position us well for long-term growth."

Those Other Bets are better known as Google's moonshots.

The company also noted that its moonshots -- which stray far from core money makers like search and Android to things like Google Fiber, Google X, Internet connectivity balloons and wearables -- showed $166 million in revenue for the first quarter of 2016. That's up from $80 million for the last quarter of 2015.

However, Google also reported that those longer-term projects, which had an operating loss of $633 million in 2015's fourth quarter, showed an operating loss of $802 million this past quarter.

The company did not break out numbers for the individual projects, so it's not clear how much money is going into driverless cars compared to smart home devices.

Judith Hurwitz, an analyst with Hurwitz & Associates, said it makes sense for Google to invest heavily in what could be future business ventures but it needs to do a better job of making up for those expenses.

"I think that it is great to spend some money on speculative inventions to both drive the brand and prepare for the future," she said. "However, they also have to be pragmatic about coming up with incremental offerings that will drive revenue in the short term."

For Jeff Kagan, an independent industry analyst, Alphabet needs to remind people why Google was split up and put under the Alphabet umbrella in the first place.

Just last year, Google went through a significant restructuring and went from being a standalone company to one of Alphabet's business units, focusing on core Internet-related businesses, including search, YouTube and Android.

That restructuring also allowed Google's big research projects to get their own executives to oversee the work, as well as have much greater attention and freedom.

"The theory was they would keep the faster growing Google core businesses separate from the speculative businesses," said Kagan. "Google is a successful company, but that does not mean everything they touch is successful. They throw ideas against the wall. Whatever sticks they build."

He added that he doubts many of Google's moonshot efforts will end up being profitable and those that are could take years to get there.

Patrick Moorhead, an analyst with Moor Insights & Strategy, said Google is fine spending big on its Other Bets right now, but investors could start complaining.

"I'm not concerned about Alphabet missing expectations," he said. "They had 23% revenue growth in constant currency, something that most tech companies would die for... Alphabet's moonshots would only become a problem if their core business suffers for an extended period of time."

While Moorhead said he's unsure about the future success of Google's Nest investment into smart home devices, as well as medical devices, the company is smart to take a leadership role in technological advances.

"Alphabet isn't a company in crisis and people shouldn't overthink what Wall Street thinks," he added.

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