It’s been a little over a month since Google announced it was changing its name to Alphabet. The move, which siphons the company’s core money-making businesses off from its ambitious “moonshot” projects, has been widely viewed by Wall Street as positive news for shareholders.
The hope is that under the new structure investors will get a clearer sense of where Google is making money — and where it is blowing it. “We believe the new corporate structure will increase visibility,” said SunTrust analyst Robert Peck in a note to clients on Monday, who thinks such visibility could support “material appreciation” in the stock.
Investors have long been irked by Google’s predilection for funneling cash made from the company’s core, money-making businesses into the long-shot projects that co-founders Sergey Brin and Larry Page are so fond of, like attempts to extend human life and create self-driving cars.
Now they’ll at least get a better sense of what’s going on. While it’s still unclear how much of a window investors will get into the details of Google’s various projects, and it doesn’t mean any of Google’s spending habits will change, Wall Street is optimistic that its insights into the goings-on will only get better.
“The announcement that Google will reorganize itself into a holding company structure is a strong step to delivering on the promise of openness and more shareholder friendly structure laid out by Page and new CFO Ruth Porat – the main focus of investors,” wrote Peck. ”Post the transition, while we still may not have sufficient details by product line, we believe the overall cost structure and leverage potential should be clearer.”
The perk that could be hiding in plain sight, said Peck, is that while Google’s revenue might be “modestly lower” after the reorganization, its margins could be “materially higher.” By his estimates, margins could approach 60%, back where they were before Google began shooting for the moon. In the last quarter, Google’s non-GAAP margins were half this at 34%.
Google, which stands out among its peers for never having returned a dime to shareholders, has alarmed investors with its rising expenses. Alluding to this in the company’s last quarterly earnings report, new chief financial officer Ruth Porat said: “We are focused every day on developing big new opportunities across a wide range of businesses. We will do so with great care regarding resource allocation.”
With the new structure (which Google plans to implement starting with its fourth quarter results), investors can better understand the revenue and profits of Google’s core search and ad businesses, while also enjoying exposure to its side projects, says Peck.
For instance, look at Google’s private investments in more than 300 companies — among them Uber, SurveyMonkey and Cloudera — for potential for a big payout down the road. Peck likens these investments to Yahoo’s stake in Alibaba, saying many investors missed their chance with Yahoo and could similarly miss their chance with Google by overlooking these investments.
Google’s own forays into next-generation technology — like smart homes, self-driving cars and fiber-optic cable – are still in early days, but these projects could prove immensely lucrative down the road.
In an August letter to investors explaining Alphabet and the company’s philosophy, Brin wrote: “We’ve long believed that over time companies tend to get comfortable doing the same thing, just making incremental changes. But in the technology industry, where revolutionary ideas drive the next big growth areas, you need to be a bit uncomfortable to stay relevant.”
With further visibility into the company, Peck is on board with the risk to reward level. “The numbers support the letters,” he concludes.
Google’s stock, which got a sizable boost from August’s Alphabet announcement, are up more than 6% over the last 12 months.
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