On May 7, Sidewalk Labs CEO Daniel Doctoroff announced that it was ending its participation in the Quayside smart city development project in Toronto due to the economic uncertainty caused by the novel coronavirus. The Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) moonshot was ripe with contention since it began in October 2017. If you own GOOG stock, here’s why you should care.
It was doomed from the start. Admittedly, as someone who is from Toronto but now lives in Halifax, Nova Scotia, I might be biased. Yet, I believe Toronto to be one of the most livable cities in the world. The news that Sidewalk Labs was calling it quits on the project is both disappointing, and at the same time, not very surprising.
“We’re disappointed that we’re not able to move forward to the next steps, but I would also say that there were some signals, and it didn’t come as a total surprise,” Stephen Diamond, chair of the Waterfront Toronto board, said after the announcement. “We had had signals with the pandemic arising, (that) generally, commercial transactions were being reviewed everywhere.”
Sidewalk Labs, Google, Alphabet, whoever you want to say was behind the Toronto moonshot, invested a significant amount of capital into the two-plus-year project. In addition to a 30-person Toronto office, The Wall Street Journal reported: “Alphabet had poured hundreds of millions of dollars into Sidewalk, with most of that earmarked for the Toronto project, and yet had little to show for it.”
Simply a Big Expense
Anyone familiar with Alphabet knows that there is Google, that incredibly profitable advertising business. In the first quarter, Google’s total revenues were $41.2 billion, 13.5% higher than a year earlier. More importantly, this segment generated $9.3 billion in operating income, a 22.6% operating margin.
The so-called moonshots, of which Sidewalk Labs is one, had an operating loss of $1.1 billion in the first quarter. In 2019, Other Bets, the actual operating segment for Alphabet’s moonshots, lost $4.8 billion on $659 million in revenue.
Way back in December 2016, I suggested the CFO Ruth Porat was a big reason to own Alphabet stock. The executive’s attention to controlling operating expenses was creating a cash flow machine. Over the past three years, Alphabet’s free cash flow has averaged $25.9 billion.
The cost of Sidewalk Labs’ participation in the Quayside project was always going to be tremendous. Once the coronavirus happened, it became abundantly clear its return on investment was shrinking by the day, making it much harder to justify to shareholders.
Moonshots, Plural
As Sidewalk Labs’ CEO stated in its goodbye letter, the unit still has a number of irons in the fire:
“While we won’t be pursuing this particular project, the current health emergency makes us feel even more strongly about the importance of reimagining cities for the future … On these fronts, we’ve already started innovative companies addressing urban mobility, next-generation infrastructure, and community-based healthcare, and invested in startups working on everything from robotic furniture to digital electricity.”
Last September, I discussed why I felt its Other Bets segment was vital to Alphabet’s future growth. Sure, it can’t lose sight of the golden Google goose, because that’s what makes it so investable, but advertising can only take it so far. The same theory applies to Apple (NASDAQ:AAPL) and its iPhones, which is why Apple CEO Tim Cook has focused more attention on the Services segment of its business.
“A business that makes or saves people time and money will always be in demand in the 24/7, 365-day world in which we live,” I wrote last September. “By continuing to invest in its other bets, it’s got a much better chance of developing the next great idea that will change the world. And that, more than anything, will influence the GOOG stock price.”
The novel coronavirus hasn’t stopped its other bets from carrying on their business. However, it has made Alphabet acutely aware of the fact it can’t be wasting shareholder funds at a time when there is so much uncertainty. It’s not smart business.
Bottom Line on GOOG Stock
Boston Review contributor Bianca Wylie recently discussed why the public-private partnership failed. If you’re interested in city building, I recommend you read it.
Alphabet needs to go back to the drawing board to figure out how it can best participate in this kind of partnership without alienating too many GOOG stock holders.
Long-term, I like the idea of tech companies contributing to the development of smart cities, but not at the expense of those who live in those cities.
Next time — and I hope there is a next time — Sidewalk Labs ought to come at a partnership from the viewpoint of a city’s residents. When the residents win, Alphabet wins.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
