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Alpha-bets from Alphabet’s Other Bets

Friday, October 15, 2021

Written by Jeremy Goldberg, CFA

Categories: PASI Stocks

Comments: 1

Most of us have likely “Googled” a product we want to purchase, only to see ads on Facebook minutes later for that same product. I’ve even seen ads for things I’ve talked about buying. Our technology listens, processes, and monetizes our conversations. Alphabet, the parent company of Google, collects, analyzes, and sells massive amounts of personal data to advertisers each year. Some may think it’s creepy, but to its credit, targeted advertising is convenient for shoppers and lucrative for advertisers. And in 2020, advertisers paid Alphabet a whopping $147 billion for that data!

Hidden below this targeted ads business and its 30%+ operating margins lies a much smaller and far more exciting division: Other Bets. Last year, Other Bets accounted for less than 0.50% of Alphabet’s revenue.(1) As a standalone entity, it’s not yet profitable (a label shared by many public companies). Fortunately, it has a cash cow from Alphabet’s Google Search by its side.

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Source: Bloomberg L.P.

Other Bets is Alphabet’s venture capital and private equity division, and is home to emerging companies at various stages of development, such as GV, X, Verily, and Waymo. Each operate independently and create innovations that break through the boundaries of technology, intelligence, and health.

GV is considered Alphabet’s venture capital arm.(2) The GV portfolio includes investments in jet.com (acquired by Walmart in 2016), Blue Bottle Coffee (acquired by Nestlé in 2017), Slack (now public: WORK), DocuSign (now public: DOCU), 23andMe (now public: ME), Impossible Foods (still private), and more. Over the last decade, Alphabet shareholders have indirectly been beneficiaries to some of Silicon Valley’s most exciting, billion-dollar private startups. GV still holds positions in these, now public, companies:

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X, otherwise known as “The Moonshot Factory,” is where Alphabet creates radical new technologies to solve large scale problems faced by millions of people. An in-development example is Taara, which is like Google Fiber but without the physical fiber cables. It uses invisible light beams for high-speed transmission of 10s – 100s of gigabits of data across up to 12 miles of air. The goal is to offer cost-effective and quickly deployable high-speed internet to remote areas. It’s already being successfully tested in India and Africa.

Waymo, X’s first moonshot project graduate and one of Alphabet’s more familiar subsidiaries, is an autonomous car business. Waymo’s robo-taxis are fully self-driving – i.e., no one in the driver seat – and operate today in Phoenix and San Francisco. As simple as any ride-hailing service, a Waymo robo-taxi is requested through the mobile app, and a driverless Waymo One vehicle arrives to pick up its passenger and safely transport them to their destination. Not surprisingly, Waymo is often compared to Tesla (to the chagrin of both company CEOs). The technical differences, however, are too important to be overlooked. For starters, Tesla’s “Full Self-Driving” label is misleading because it’s only semi-autonomous. Someone must be in the driver’s seat providing constant supervision and occasional intervention. Waymo, on the other hand, is exclusively fully self-driving. There’s no confusion about who is in control since no responsibility ever falls on the passenger. In unusually tough-to-navigate circumstances like a new construction zone, Waymo has a remote team on standby that automatically provides strategic high-level guidance to Waymo vehicles.

The most important distinction is how each company’s technologies work. Tesla’s Autopilot system will use “Tesla Vision,’ which relies on a camera-based system that monitors a vehicle’s surroundings and uses machine learning to determine the best path forward. Tesla is building eyes for its vehicles. It sounds really cool and futuristic, but that doesn’t necessarily make it the most effective.

Waymo uses several sensor systems in addition to cameras, like lidar (light-based sensors) and radar (radio wave-based sensors), to create “the World’s Most Experienced Driver.” With over 20 million self-driven miles on public roads and more than 10 billion miles of simulation, the mapping system is incredibly robust. Unlike Tesla, Waymo is building a driving infrastructure that relies on both vision and sensors, not just vision. And you don’t have to pay thousands of dollars to use its services!

From smarter COVID-19 testing to specifically-targeted nanoparticle therapies at the individual cell level, Alphabet’s Verily is changing how we battle disease and increase longevity. Verily has multiple products, subsidiaries, and partnerships with some of the leading life science research centers, including Mayo Clinic, Harvard, MIT, and even Microsoft. Liftware, a subsidiary of Verily, creates forks and spoons that self-level and self-stabilize for individuals diagnosed with Parkinson’s Disease and other neurological disorders. What was once a disheartening challenge multiple times per day – eating with utensils – is now possible regardless of hand tremor severity. Liftware (www.liftware.com/level/) can probably change someone’s life that you know.

PASI is tasked with ensuring our clients are invested in the best and brightest innovations, but this must be balanced with risk management. Alphabet is projected to generate more than $200 billion of revenue and $60 billion of free cash flow in 2021, boasts double digit earnings growth, and holds $123 billion of net cash. Shares trade at a ridiculously reasonable 22.4x 2021 earnings estimates, while the broader market, measured by the S&P 500 index, trades at 21.6x 2021 earnings estimates. Alphabet has double the growth prospects of the market but shares hardly reflect their warranted premium. Other Bets, and all of its incredible technologies, is a free call option on Alphabet’s moonshot projects. Long-term, it’s a great investment.

Notes and Sources:
1) Alphabet 10-K (2020)
2) GV spun out of Alphabet in 2009 and operates as an independent, return-driven venture capital fund. Alphabet, however, is the sole limited partner, so for all intents and purposes, GV is Alphabet’s venture capital business.

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