When Ruth Porat was hired earlier this year as CFO by the company then known as Google and now known as Alphabet, a primary objective was to help the search giant "invest in a thoughtful, disciplined way in our next generation of big bets." Those "big bets," or "moonshots" as they're sometimes referred to, include new gadgets and solutions developed in the secretive Google X labs and its life sciences unit, to name a couple. Now, Porat is prepared to address Alphabet's rampant spending, but will it be enough?
To the dismay of many investors and industry pundits, Alphabet's Google X and other cutting-edge pursuits have for too long been associated with a lot of overhead, and very little to show in return. The self-driving cars, Google Glass, and nano-technology designed for use in the healthcare industry are "neat," but some fear the efforts detract from what Alphabet does best: generate nearly $17 billion in advertising revenue, as it did in Q3.
What's the big deal?
Part of the problem with Alphabet's continued pushing of the innovation envelope is that it is nearly impossible to determine just how much of its $6.93 billion in operating expenses last quarter went to fund its moonshots, compared to how much was spent to grow revenue. Investors aren't enamored with uncertainty, but they have been forced to live it when dealing with Alphabet and its "big bets." But that's about to change.
Pay to play
In addition to monitoring spending for Alphabet's far-flung efforts, Porat has already made strides in managing expenses, but she recognizes that clarity is needed. As Porat said in an October conference call, "after a period of big expense buildup, there was an appreciation that we needed to manage the cadence of spend." That seems to be CFO-speak for opening Alphabet's books so investors can see what it's spending for those Project Loon balloons, delivery drones, and other wild notions.
As Alphabet continues its transformation into a tech conglomerate, it will now reportedly require its moonshot divisions to pay for the services the units utilize, including marketing and computing support. Paying for corporate services, and reporting those expenses once the new financial structure is unveiled next year, could be viewed as a means of reining in costs and appeasing investors by sharing expense particulars.
Developing distinct financial statements for Alphabet's various enterprises would also position the units to be spun off. And operating as distinct businesses with an end goal of becoming independent entities is more than just idle talk. "We are very much thinking [Google divisions] will continue to grow and be independent entities," Porat said during Alphabet's Q3 conference call last month.
Alphabet is not alone
Alphabet is hardly the only digital advertiser pushing the innovation envelope. It was just a few months ago that Facebook (NASDAQ:FB) took the wraps off its own mini-moonshot when it unveiled its first solar-powered drone. The objective is to further CEO Mark Zuckerberg's Internet.org initiative to bring connectivity to the world's under-served masses.
In addition to its odd-looking Loon balloons, Alphabet has its own drones to accomplish much the same things as Facebook. Connecting the world to the Internet serves a couple of purposes for both digital advertising behemoths. One, it's a philanthropic effort that will quite likely change the Internet-using landscape for the better. Two, both Facebook and Alphabet will benefit as more users come online. More users translate to more opportunities to do what each does best: sell digital advertising to their marketing partners.
But contact lenses with a mini built-in camera, a teleportation device, or hoverboards? What are the chances that the investment of time, manpower, and money that Alphabet has sunk into all of those off-the-wall endeavors actually realizes any revenue, let alone profits? Unfortunately, despite the decision to share the expenses of its divisions, investors shouldn't expect spending on its moonshot projects to slow anytime soon.
Appeasing investors by shedding some light on overhead is a good first step. However, it's telling that CEO Larry Page also has another plan in mind: increase spending in areas including healthcare and transportation solutions. When it's said and done, Alphabet's decision to charge its divisions for its services and subsequently share those costs sounds good, but the rampant spending on moonshots will continue. The only difference is that soon, investors will know how much.
Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares) and Facebook. 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.