Google parent Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) reported robust second-quarter earnings last night, showing the core advertising business is as strong as ever while Google Cloud continues to gain momentum. Keeping costs in check was critical in delivering a bottom-line beat relative to analyst expectations, despite getting hit with a massive $5.1 billion fine from the European Commission over antitrust allegations.
The holding company's Other Bets segment, otherwise known as its moonshot division, is a bit smaller after Nest was reintegrated back into Google earlier this year. It's also hemorrhaging cash.
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Other Bets — which recently welcomed Loon and Wing into the fold — generated just $145 million in revenue during the quarter, which translated into an operating loss of $732 million. The losses widened from a year ago, despite revenue growing a fair amount.
The biggest revenue drivers within Other Bets were Fiber (which provides gigabit fiber to select cities) and Verily (the healthcare business that researches life sciences), according to CFO Ruth Porat. The segment also accrued roughly $10 million in capital expenditures.
Nest had previously been the largest subsidiary within Other Bets, and Alphabet disclosed the smart-home company's financials for the first time earlier this year. Nest had generated $726 million in revenue throughout 2017, or about 60% of total Other Bets revenue for the year. It also lost $621 million during that time, or less than 20% of Other Bets' operating loss.
Waymo continues on the road toward a self-driving future, with Porat highlighting its recent deal to add upwards of 62,000 Chrysler Pacifica minivans to its self-driving fleet. The company said last week that it had reached 8 million miles driven on public roads, a momentous milestone. Waymo's progress is accelerating, too: Over 3 million of those miles were driven in 2018 alone. Developing autonomous vehicles will require copious amounts of data, and Waymo has few peers in this department.
Building the future is expensive
While Other Bets is fairly small in the grand scheme of Alphabet's financials — the company reported consolidated revenue of $32.7 billion — it's still a critical area that investors should keep an eye on. Remember that providing greater investor transparency regarding just how much Alphabet was investing in moonshots was the whole reason it restructured into a holding company back in 2015.
Additionally, Other Bets' operating loss is not insignificant in absolute terms, and could soon approach $1 billion per quarter. Put another way, Other Bets took an 8% bite out of Google's $8.9 billion in operating income during the quarter. Fortunately, the search business remains wildly profitable, and investors know that experimentation is a part of the company's culture. It's what you sign up for when you invest in Alphabet, and no one ever said the future would be cheap.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy.
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