Alphabet’s Core Business Is Rocking

Alphabet and its core business of advertising continues to post amazing growth and profit numbers. But what about its “other bets” segment that caused the company to change its name in 2015? Is that business contributing to the search giant’s success? On a Fool Live episode recorded on April 28, Fool contributors Brian Stoffel and Brian Feroldi discuss whether it should even matter to investors.

Brian Stoffel: I’m going to talk about Alphabet. For those who don’t know what Alphabet is, that’s just the name of the parent company for Google. They also reported recently, it was last night and they also, though they’re not getting the same bump that Shopify is getting, they’ve reported really great earnings. To give you an idea, Google Services, which is mostly advertising but there are some other add-ins there, revenue was up 34%. Now, let’s put this in perspective. We’re talking about a company that’s worth over $1 trillion and they’re growing. Their advertising business was up 32%. Of that, YouTube was up 49%. As Chris Hill said earlier today, they made $6 billion dollars in 90 days. That must be nice.

Their cloud revenue which is much smaller was up 46%, their “other bets” was up 47% but that is a little bit misleading because it is less than one drop in the bucket. When we look at gross profit, all the gross profits still comes from Google services which is advertising basically. But their gross profit was up 69% while revenue was up 34%. That means they’ve got some really great leverage there. They announced a $50 billion share repurchase and where they stand right now is we’re talking about a company with $135 billion in cash just 14 billion in debt and over $51 billion in free cash flow over the past year.

Brian Feroldi: This reminded me very much of Shopify‘s quarter.

Stoffel: Yes, it did.

Feroldi: When I was like everything looks good, literally everything, but I actually do have a nitpick here versus Shopify where it was hard to pick anything. The other bets division is a rounding error and the company has been investing in these other bets for 10-plus years, should we expect something to pay off at this point?

Stoffel: You’d think so? I love their approach because their approach is a barbell. We’re going to throw 80% of what we’ve got behind advertising, we’ll develop the rest on the side.

But what I will say Brian is this, because I was thinking about this, the companies that are able to have other bets that really succeed are the ones where all those other bets are still in pursuit to the overarching company’s mission. Think about Amazon, they want to be Earth’s most customer-centric company. All their other bets like AWS was in the “other bet” for them at one point in time. Selling anything more than books was the “other bet” at one point in time. Developing a streaming video service was an “other bet” for Amazon at some point in time. Amazon had all these other bets become widely ridiculously successful while we’re still waiting on Waymo to be monetized in some way shape or form and I feel like I haven’t even heard about that in months.

The difference that I notice is that all those other bets, they’re not in pursuit of the same mission that Google’s core business of making information available to everybody. I wonder if we’re learning something about how to have the barbell approach here. I don’t know how much longer we should give the other bets division, I also don’t care because everything else is just doing so well.

Feroldi: Fair enough. Hard to complain about a rounding error on the income statement when everything else grew 34%. [laughs] Yeah, fair enough.