As you may or may not know, Alphabet Inc (GOOGL, GOOG) stock leaped past Apple Inc. (AAPL) on Tuesday to become the world’s largest publicly traded company. The parent company of Google now has a market cap of around $530 billion, topping Apple’s, which sits at a measly $525 billion.
The two companies may spend some time trading that title back and forth this year … or they may not. It’s truly meaningless in the long run.
Speaking of the long run, that’s precisely what Alphabet’s newly broken out “Other Bets” segment is supposed to be for.
As GOOG stock owners will recall, the company announced a surprise restructuring in August 2015, turning itself into a holding company that more or less amounted to Google and “everything else.” This way, investors could see how well Google’s core business was doing compared to the more speculative, long-term “moonshots.”
Well, GOOG stock owners now see, for the first time, just how well those “Other Bets” are doing.
In a word: Horribly.
No Near-Term Catalysts in “Other Bets”
I’m being a little glib. Yes, on paper the “Other Bets” results were sickening, but no one expected them to be profitable to begin with. Investors have known for years that GOOG stock was seeing an earnings drag from its non-search-related experiments … the question was always how much of a drag those bets had become.
The answer: A substantial one.
The Google segment posted revenue of $21.18 billion in the fourth quarter, up 18% year-over-year. That translated to operating income of $6.77 billion, up 30% from the $5.22 billion a year before.
By comparison, “Other Bets” was entirely miserable. GOOG shareholders cringed as they saw moonshots take in just $448 million, up 37% annually, and produce an operating loss of $3.6 billion, up 84% from $1.9 billion a year ago.
CFO Ruth Porat gave investors some nice context regarding this segment on Google’s Q4 earnings call, saying, “The majority of efforts within the Other Bets are pre-revenue.” That’s excellent news: It means there’s plenty more powder in the keg. It’s not like GOOG is currently even expecting these things to churn out dough.
So actually, the financial results from the Other Bets segment merely reinforce the strength of Google’s core business; we can now see just how much these side bets are dragging down overall results. Despite the drag, GOOG beat on both top- and bottom-lines, with revenue of $21.33 billion and non-GAAP EPS of $8.67. That easily exceeded the $20.77 billion and $8.10 per class A share that Wall Street wanted.
At the end of the day, there’s a lot to Google aside from its search engine, but none of it is close to being material yet. Just as the iPhone is the lifeblood of AAPL, search is the lifeblood of GOOG.
Seeing as Google revenues rose 18% year-over-year and iPhone sales were flat year-over-year, I expect Google to be larger than Apple for some time going forward.
And when “Other Bets” start to pay off — watch out.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.