Good fences make good neighbors
Last quarter and consistently throughout the company's history over 90 percent of Google's revenues have been produced by its search advertising and Google sites businesses including Google Play and YouTube.
In a report about the new structure, Nomura research analyst Anthony DiClemente underscored the idea that increased transparency should increase shareholder value. "Investors have long desired better visibility into the trends and profitability of Google's core business outside of investments in more speculative projects like Google Fiber, Project X and Calico," DiClemente said. "Under the new structure, opex investment in these more long-term investment initiatives will be excluded from Google's reported results, providing investors a clearer picture of the core businesses underlying trends."
DiClemente's report pointed out that investors can value the core business's revenues and profits without the drag of investment in the moonshots. They don't value the potential big growth areas as much as understanding the amounts that Alphabet will invest in incubation.
"What we don't yet know about Alphabet may be the most interesting," says Harvard Business School professor of entrepreneurial management Thomas R. Eisenmann. "Alphabet could finance the moonshots' growth by selling equity (called tracking stocks and letter stocks) that restricts the new investors ownership to just a moonshot business or segment and wouldn't consume any of the $68 billion of cash on Alphabet's balance sheet. Management's necessary long-term horizon for these businesses might also be protected by issuing shares to new investors with proportionately fewer votes per share like the original Google initial public offering." It seems like ancient history now, but new outside investors in Google received one vote per common share, compared to the 10 votes per share held by founders and venture investors, which left existing investors in control," he says.
If adopted, Eisenmann says, "This new capital structure would naturally sort investors based on risk and reward."
With access to outside capital as described by Eisenmann, the incubating moonshots have a better chance to become high-growth businesses like YouTube, Google Maps and Android without making large cap investors uncomfortable. And if all goes well, some of Wall Street may value Alphabet more on transformative expectations and growth than just revenues and profits like it has for near-profitless Amazon and profitless Tesla.
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