Nest — the Alphabet Inc (GOOGL, GOOG) company that builds smart thermostats — might have a management problem.
A recent report from Business Insider notes that founder and CEO Tony Fadell was not only disliked by his staff, but was feared as well, and that “sitting near Fadell’s office meant hearing a constant barrage of shouting.”
Employees are leaving the company, and only about half would recommend working there to a friend. If management doesn’t get it together, Nest could experience a brain drain as top talent leaves for a better work environment. And Nest needs that talent.
After GOOGL released its segmented results, Google stock investors were disappointed with the lack of profitability and revenue from Alphabet’s Other Bets.
Nest is one of the more mature businesses in the segment. With talent leaving and revenue disappointing, Google stock investors may be wondering if the company wasted money on Nest.
Talent Leaving the Nest
Alphabet acquired Nest in 2014 for $3.2 billion, and management’s track record has been littered with warning signs since the takeover. Management has fostered a culture where it’s always “crunch time,” according to ex-employees. Shortly after Nest acquired Dropcam for $555 million, both founders of the security camera company left. Now Fadell has just a 70% approval rating on anonymous data-sharing site Glassdoor.
Comparatively, 97% of employees approve of sister company Google CEO Sundar Pichai, and 91% of Google employees say they would recommend working at Google to a friend (if they can get a job there). Apparently, the Google company culture has not rubbed off on Nest.
As a result, Nest Labs faces a much higher risk of losing talent. The company is still working on expanding its product portfolio. It currently sells its flagship thermostat, a smoke detector and the Dropcam security cameras.
Eventually, Alphabet wants Nest to produce any and all connected devices in consumers’ homes. As such, it needs to be fostering talent, not driving it away.
Disappointing Results for GOOGL
It’s unclear if Fadell’s management capabilities have led to disappointing results, but the company’s revenue came in well below expectations when GOOGL reported its fourth-quarter earnings.
Analysts estimated Nest generated around $300 million in 2014. In 2015, the entire “Other Bets” segment produced just $448 million in revenue — just 37% year-over-year growth. More importantly, the operating loss from Other Bets totalled $3.6 billion — about 15% of Google’s operating income, but negative.
That loss nearly doubled YoY in 2015 after nearly quadrupling the year before. And Alphabet is funnelling huge amounts of R&D, capex and marketing dollars into its Other Bets and it’s not seeing any payoff.
Analyst Jan Dawson of JackDaw research even went as far as saying “The prospects for Nest and Fiber as revenue generators and profitable businesses are not great,” after Alphabet released its first look at the Other Bets segment.
There is a chance for Nest to accelerate its revenue growth, however, as smart home adoption is still in its early stages.
The problem is more competitors crop up every year, meaning that Nest needs to continue innovating and attracting top talent. Management isn’t doing a good job at either right now, and that should concern GOOGL investors.
As of this writing, Adam Levy did not hold a position in any of the aforementioned securities.
