Innovation costs money. And Alphabet’s latest quarterly earnings announcement demonstrated that the company is tapping into traditional cash sources – advertising and investing — to fund innovation.

The premise of forming Alphabet in October 2015 was to free up businesses beyond Google to focus on innovations (which Alphabet calls moonshots) such as autonomous vehicles. Since then, Alphabet has also been developing a latticework of businesses either through organic growth or acquisition.Those businesses include (among many others) Nest for smart home devices, Verily for healthcare and disease prevention research, and Sidewalk Labs for making cities more connected and smarter. And those are but a small segment.

Against this backdrop, Alphabet announced quarterly earnings April 23. Its first-quarter revenues of $31.1 exceeded analysts’ expectations and represented a 26 percent year-over-year increase. And the money is not coming from anything particularly innovative. Rather, Alphabet is getting buoyed by:

  • Advertising: Alphabet earned $26.6 billion in the first quarter – easily the lion’s share of the $31.1 billion in revenue and up nearly 20 percent year-over-year
  • Investing – a $3 billion gain from Alphabet’s investment portfolio, which includes, ironically, an investment in Uber, the subject of a bitter lawsuit with Alphabet’s autonomous car unit Waymo

Alphabet is making money the old-fashioned way, but it’s also plowing that money into innovation as it promised – and paying a short-term price for a long-term gain. For example, Nest lost $621 million on revenue of $726 million in 2017. Alphabet’s Google Fiber high-speed internet network hasn’t expanded as rapidly as it was supposed to have.

Alphabet’s investments into other businesses are paying off financially. But it’s going to take time and money for Alphabet’s investments into innovation to bear fruit. In the publicly traded sector, Alphabet wields some enormous advantages over smaller competitors: cash, scale, and a nimble operating model.

The holding company operating model gives Alphabet businesses to act as quickly as a start-up, thus mitigating against the risk of Alphabet being slowed by bureaucratic decision making. Scale gives Alphabet the ability to quickly provide an infrastructure to develop new ideas in areas such as virtual reality. And cash is the engine that fuels innovation.

Investing and advertising isn’t as sexy and interesting as, say, launching exciting new content (the story of Netflix’s latest earnings announcement) or experimenting with business models (as Kohls discussed in its latest earnings announcement). But in due course, Alphabet is counting on future earnings announcements to have more to say about Alphabet’s advertising and investing savvy resulting in its moonshots taking flight.

Here are some recent posts as part of our series on innovators’ earnings:

Netflix Soars as BIG Content Investments Pay Off,” April 17.

Target Trades Punches with Amazon and Walmart,” March 6.

Kohl’s Investments, Experiments, and Rigorous Focus on Data Pays Off!” March 1.

Walmart Fights a Bloody War Against Amazon,” February 20.

Saul Delage

Saul Delage

VP Growth