Imagine, if you will, a gleaming robot, looming large and striding purposefully through the woods. Actually, you don’t have to imagine it, as that’s just what robotics company Boston Dynamics managed to build.
But aside from the novelty that comes from being in robotics, Boston Dynamics is, to put it bluntly, nothing more than a “dead horse.”
That is why it comes as no surprise to learn that Boston Dynamics’ parent company, Alphabet Inc (GOOGL, GOOG) is putting it up for sale. Simply put, Boston Dynamics is just not a moneymaker.
Surprising as it may sound, Boston Dynamics’ head on Alphabet’s chopping block could actually bludgeon up some good news for GOOGL stock.
GOOGL Stock’s Achilles’ Heel
Even before management rolled Google up and under the Alphabet umbrella, its Achilles’ heel tended to put investors off — that is, the infamous moonshots. Moonshots are the highly futuristic, long-stretch projects on Google’s drawing board, including Google’s self-driving car, anti-aging and, of course, robotics.
The inherent problem with moonshots is a high level of uncertainty, with fruition attainable only at a very long distance. No one knows how much cash the company is hemorrhaging on moonshot projects. Whether or not these projects could ever yield a profit is also questionable.
Finally, information on any of the moonshot projects was incredibly sporadic (not to mention vague). And rather than pique interest, it led investors to wonder just how big the mess really was.
That, of course, is the crux of the issue. Management knows that it has to clean up the mess … and fast, before those moonshots spin out of control.
And that is exactly what Alphabet has finally started doing.
The company’s response was to hire a “responsible adult” to clean up the mess, bringing on Ruth Porat as Chief Financial Officer of both Google Inc. and Alphabet Inc. Porat is a Wall Street veteran who has held many notable positions, including as Vice President of Investment Banking at Morgan Stanley (MS).
Porat, clearly, is not one to let the grass grow under her feet; she moves quickly and stealthily. According to sources, it was she who orchestrated the transition from Google to the holdings company, Alphabet. That transition toward a new structure provided much needed clarity for the massive tech company.
Slicing and dicing the GOOGL subsidiaries, Porat placed them under two segments — Google and “Other Bets.” The Google segment includes all of the company’s core businesses, such as Search, AdWords and YouTube. Its Other Bets segment includes Nest, Fiber and all other moonshots.
The transition to the Alphabet umbrella enabled investors, for the first time, to quickly assess profitable segments. The transparency that came with the Alphabet structure soothed investors’ fears (to some extent).
With that transparency, certain things have become crystal clear. The Other Bets segment was weighing heavily on GOOGL stock. In fact, operating losses from Other Bets ballooned from $1.9 billion in 2014 to a whopping $3.5 billion loss in 2015.
Boston Dynamics: The First of Many?
As you might have already guessed, part of the massive $3.5 billion in losses from Other Bets is undoubtedly Boston Dynamics.
Google acquired Boston Dynamics in 2013 for its robotic initiatives, which was dubbed “Replicant” within Boston Dynamics. According to some reports, Boston Dynamic’s refusal to cooperate with other robotics engineers at Alphabet may have led to the decision to sell. Certainly, that played a part.
But according to Bloomberg, there’s more to it than that.
They believe Boston Dynamics likely didn’t have any products in the pipeline in the foreseeable future that could generate profits. Moreover, Bloomberg says that the move is part of the grand strategy behind the transition from Google to Alphabet. That strategy, of course, includes scaling down projects that don’t make revenues.
Simply stated, Alphabet’s strategy is to ditch moonshots that are not expected to generate profits. This strategy clearly has Ruth Porat’s fingerprints all over it. And it is a big deal, because it means that Alphabet wants a clear path to investment returns, even with its moonshots.
Is Boston Dynamics Priced In?
One thing’s for certain, GOOGL stock will benefit from the sale of Boston Dynamics. It’s also certain that this is part of a strategy to stop the cash spillage from the Other Bets segment.
But there is a caveat: they’re already priced in! Not just the Boston Dynamics sale, but the entire pie. Investors are already pricing in that the $3.5 billion loss will turn to null. Zero. Let’s crunch some numbers to prove the point.
We know that Others Bets has an operating loss of $3.5 billion. If we take Alphabet’s net profit of $16.3 billion and add the $3.5 billion (as if the loss did not exist) we would get $19.8 billion in net income. According to Morningstar, GOOGL’s average five-year price-to-earnings multiple is 26. If we multiply $19.8 billion by the average P/E multiple of 26, we get a potential market cap of $515 billion for GOOGL stock. And that’s without considering taxes.
But GOOGL’s stock price after investor got wind of the sale suggested a market cap of around $523 billion, which is even higher. It seems investors are already pricing in a scenario in which Boston Dynamics’ sale, as well as the other subsidiaries, would close the $3.5 billion leak.
Buy the Fact, Not the Rumor
There’s no escaping the fact that investors have already priced in a smaller Alphabet. So for GOOGL stock to maintain momentum, it must sell Boston Dynamics and the other unprofitable subsidiaries.
If investors get any sense that Alphabet is fudging on its plan to scale down, GOOGL stock price will move accordingly.
What’s the smart thing to do? Contrary to popular belief, it’s not to buy on the rumor. Ignore the hype and wait it out. The time to act depends on when the Google rumor mill starts churning out facts.
As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.
