A friend recently sent me an article about the newest moonshot at X, the research lab operated by Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG). If the project is successful, it could send GOOGL stock on a moonshot of its own.
Perhaps you’ve read about it. Code named Malta, the people at X are looking to develop a system for storing renewable energy that could put the lithium ion battery and other existing methods of storage out to pasture.
“If the moonshot factory gives up on a big, important problem like climate change, then maybe it will never get solved,” said Obi Felten, a director at X. “If we do start solving it, there are trillions and trillions of dollars in market opportunity.”
While this all sounds wonderfully exciting, not to mention innovative, investors shouldn’t simply accept that this project is a necessary cost of growth.
The ABC’s of Alphabet’s Business Doing Well
Thankfully, for GOOGL shareholders, the advertising business continues to deliver excellent quarterly growth in both revenues and profits. Free cash flow sits at $25.2 billion for the trailing 12 months despite losses from its other bets and a $2.7 billion fine from the European Commission for violating European competition laws.
Recently, I suggested that Alphabet acquire Whirlpool Corporation (NYSE:WHR) to expand its presence into the home while reigniting Nest’s growth. Acquisitions such as these are rooted in reality and enable Google to leverage its tech understanding for the mass market and not the niche areas X is going after.
Google’s Founder-Centric Model Flawed
Management innovation expert Steve Denning describes three approaches to capitalism:
1. Shareholder centric = Apple Inc. (NASDAQ:AAPL)
2. Customer centric = Amazon.com, Inc. (NASDAQ:AMZN)
3. Founder centric = Alphabet
“Apple built its fortune under Steve Jobs as a design-based, customer-focused firm; in recent years it has gone along with Wall Street’s demands to extract value for shareholders, while losing ground to competitors in fields it once dominated, such as high-end PCs, voice-operated hardware, video software,” Dunning wrote July 31 in Forbes.
Dunning’s saying Apple’s replaced innovation with dividends and share repurchases.
“We will continue to focus relentlessly on our customers,” says AMZN founder/CEO Jeff Bezos. “We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.”
Bezos believes that if you do what’s best for the customer, ultimately, shareholders will be rewarded, a concept that management guru Peter Drucker subscribed to suggesting the only purpose of a company is to create a customer. It’s not to make the shareholders or founders rich.
“Google has opted to keep control by its founders and executives,” says Dunning. “Yet despite vast expenditure on a host of initiatives, Google remains a one-trick pony. Its combination of search and ads generates a vast amount of money. But since then, none of its other experiments have had a comparable impact.”
CFO Ruth Porat was specifically brought in to ensure Alphabet wasn’t wasting a ton of money on expensive hobbies. In the process, she’s become known in the tech world as “Ruthless Ruth,” a less-than-flattering moniker.
In the latest quarter, Alphabet’s “other bets,” which includes X, had an operating loss of $772 million, 9.7% lower than a year earlier, on $248 million in revenue. In fiscal 2017, those wagers will likely lose more than $3 billion, about the same amount as it lost in each of the two previous years.
Rather than invent stuff that’s out there, Google should innovate for the masses, because that’s where the real money lies.
Bottom Line on GOOGL Stock
Should investors be worried about Project Malta?
I don’t think so as long as Porat is CFO. Long-term, however, Alphabet’s founder-centric model of capitalism, which seems to live and die on the whims of Larry Page, has got to stop.
If it doesn’t, ultimately, GOOGL stock will suffer the consequences, but that’s a long way off. It’s still a buy.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.