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Is Google Inc.'s Billion-Dollar Bet on Elon Musk a Good Deal?

By Andrew Tonner - Jan 27, 2015 at 10:00AM

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Should the average investor be up in arms about Google's most recent billion-dollar gambit?

When I read recently that search giant Google (GOOGL -0.31%) (GOOG -0.30%) was finalizing a whopping $1 billion investment in Tesla CEO Elon Musk's privately held space flight start-up SpaceX, I couldn't help but think back to my childhood. Bear with me. I promise I'm going somewhere with this.

As a kid, my older brother and I were fans of the short-lived, highly acclaimed animated sketch series Animaniacs. One recurring skit was called "Good Idea, Bad Idea," which exactly matches my positive-and-negative reaction to Google's bold move. Let's look at why I both love and hate its $1 billion investment in SpaceX.

Good idea: Investing in the future of the Internet
To say Google has taken an interest in expanding the reach of the Internet is an extreme understatement. Broadly speaking, this interest is very good thing for both humanity and Google.

Since you're reading this online, you're probably someone for whom Internet access is more or less a given. But global Internet penetration sits at a frustratingly low 40%, according to International Telecommunications Union. Hopefully, I don't have to extol the myriad virtues of the Internet (expanded educational opportunities, improved health care, etc), so let's just say the world could benefit significantly from universal access to the Web.

It's also no grand insight that Google also stands a profit hugely from expanding its potential customer base by a whopping 4.2 billion people. That's why Google is helping lead a massive push into new technologies and distribution methods, including its Project Loon balloons an nd this SpaceX deal that could help expand Internet availability via satellites.

Bad idea: Spending $1 billion in doing so
In assessing this from an investor's perspective, it's mainly the price tag that gives me pause. According to reports, Google will own nearly 7.5% of SpaceX after this round of funding. Although there is obvious business merit to buying itself a seat at the table with one of the promising forms of Internet distribution, it will be a long time before Google sees a return on that $1 billion investment, if ever.

Also, SpaceX's future, let alone its long-term business model, remain very much an open-ended question. The company continues to grapple with problems with its rockets, making the front page of the world's papers with every failed takeoff or landing, including this one from last week.


A metaphor for Google's investment? Source: Vine.

The SpaceX-Google alliance also faces another technical challenge: actually broadcasting the signal from space to Earth. According to reports, neither Google nor SpaceX controls enough spectrum rights to make a project such as satellite-based Internet access a reality. Between Google, SpaceX, and Musk's other vast resources, though, it's probably fair to assume they could eventually get their hands on enough spectrum to make this dream a reality.

The point I'm ultimately trying to make here is that this project is both expensive and risky.

High risk, high reward
On one hand, you have to love Google's interest in pushing the boundaries of new technologies through this project, among many others. However, this effort clearly has its share of red flags as well. Ultimately, it will likely be years before we can properly assess whether this was money well spent on Google's part. Regardless, don't expect these kinds of "moon shot" investments to stop anytime soon.

Remember, Google co-founders Larry Page and Sergey Brin, along with Executive Chairman Eric Schmidt, effectively control all decision making at the company thanks to its new-ish share structure. So ultimately, while Google investors might never receive any tangible benefit this recent $1 billion investment, these kind of aggressive bets on the future are also simply a reality of being a Google shareholder as well. For better or worse, this is just business as usual for Google shareholders. Here's to hoping it pays off.

Andrew Tonner has no position in any stocks mentioned. The Motley Fool recommends Tesla, Google (A shares) and Google (C shares). The Motley Fool owns shares of Tesla, Google (A shares) and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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