In 2015, Google announced it would rebrand as Alphabet (GOOG 0.56%) (GOOGL 0.42%), signaling the company's intentions to be more than just a suite of ad-driven products. Investors cheered the move, sending the stock up 4%, and Google management said the decision was modeled after Warren Buffett's Berkshire Hathaway, designed to create a conglomerate of thriving tech businesses.
Google split Alphabet into two primary segments: Google, which included its ad businesses including YouTube and Google-branded hardware; and other bets, which was made up of "moonshots" like autonomous vehicle start-up Waymo that aimed to solve some of the world's biggest problems.
At the time of the announcement, investors envisioned a tech behemoth dominating a wide range of industries beyond search. However, that hope hasn't been borne out. In 2021, Google lost $5.3 billion in other bets and made just $753 million in revenue in the segment.
Over the last six years, essentially since Google rebranded as Alphabet, it's lost $23.4 billion on other bets and made just a fraction of that in revenue. It has also yet to produce any major successes.
During the peak of the hype cycle around self-driving cars, Waymo fetched an estimated valuation of $175 billion, according to Morgan Stanley. However, in its latest funding round in 2021, it raised money at a valuation just over $30 billion.
While investors cheered the rebrand to Alphabet at the time, seven years later, the business is still clearly driven by advertising, which made up more than 80% of its revenue in 2021.
Fast forward to Facebook's rebrand
In October, Facebook announced it would change its name to Meta Platforms (FB 3.77%), signaling its own intention of reinventing itself. The Facebook parent wants to be more than just a social media company. Its ambitions now stretch to being the leader of the metaverse -- the embodied internet accessed through tools like virtual-reality headsets.
Image source: Getty Images.
But Facebook's rebranding has more than just the name change in common with Alphabet. The new segment it just broke out, reality labs, which represents its virtual- and augmented-reality division, looks like a giant money pit.
Over the last four quarters, the company posted a $10.2 billion operating loss in reality labs and expects that loss to "increase meaningfully" in 2022, as CFO Dave Wehner said on the earnings call. The 2021 operating loss in the segment is already double what Alphabet is experiencing with other bets, and Meta seems to be just getting started.
The lesson from Alphabet
Despite Alphabet's grand ambitions to be the tech version of Berkshire Hathaway, seven years later, the company is still primarily an advertising business and lost $23 billion on its collection of start-ups that seem to have little hope of reaching the moon. These include its cable/broadband competitor, Google Fiber, its Verily life-sciences business, and a venture-capital arm, GV.
Part of the challenge is that it's hard to build new businesses from scratch, but Alphabet also owns one of the biggest businesses in the world. Google's market share in search is dominant in most of the world and drives huge profits.
The scale of its search business will make almost anything small by comparison. That gives the company leeway to invest in other bets, but it may also be better off focusing its energy where its profit center is. It's also fair to question whether Alphabet is simply throwing money away on those other bets.
The same seems true for Facebook. Like Google, it's an advertising juggernaut with profit margins that would make almost any other company envious. Straying too far from its core strength in social media could be expensive, and the costs from reality labs are adding up quickly.
An important difference between Meta and Alphabet
Despite the many similarities between the Meta and Alphabet rebrands, there's a key difference: The Facebook parent isn't launching an array of start-ups with a diverse set of goals. Its new business is singularly focused on the metaverse, and it's not the only tech giant with eyes on what appears to be the next frontier in technology.
Microsoft acquired Activision Blizzard, in part to give it entry into the metaverse. Apple also has its eyes on the virtual-reality space, though the iPhone-maker is famously secretive. Chip-giant NVIDIA is also focused on building software for the metaverse.
Rather than comparing reality labs to other bets, a better way to think about the metaverse and Meta's approach to it, is that it's at a similar stage of development to where the internet was in 1994 or 1995 in its infancy. Companies like Amazon were first starting to launch their online businesses, and investors were ramping up to pour billions into any enterprise with a .com at the end of it. However, internet usage back then was only a fraction of what it is today, and its utility has greatly increased with the advent of the mobile internet and smartphones.
Whether the metaverse becomes the next iteration of the internet remains to be seen. What is clear is that Facebook's intentions to invest heavily in reality labs, along with challenges in its advertising business, will put the brakes on its profit growth over at least the next year or two.
Still, if the metaverse turns out to be the next internet, Meta's big bet will certainly pay off.
