NEW YORK (TheStreet) -- It's only a matter of time before Alphabet investors separate the wheat from the chaff. Let me explain.
Last night the company now formerly known as Google (GOOG) - Get Alphabet Inc. Class C Report (GOOGL) - Get Alphabet Inc. Class A Report and now known as Alphabet announced a new operating structure that in some ways looks to shine the light of transparency on the Internet search giant and its various businesses. That's right! There are other business outside of the two most well known ones -- Internet search and Android -- found inside the company now known as Alphabet, but a host of them that have been and, in some cases, will continue to be a drag on the overall bottom line. Examples include drones, self-driving cars and Internet-connected balloons that form Google X as well as YouTube, Google Fiber, Google Ventures, and Google Capital. The biggest and most profitable company inside Alphabet will be the Internet search business that we all know as Google. All clear?
If you're thinking the new organizational sounds familiar, it is. In many ways Google founders Larry Page and Sergey Brin took a page from Warren Buffett's playbook for Berkshire Hathaway (BRK.A) - Get Berkshire Hathaway Inc. Class A Report (BRK.B) - Get Berkshire Hathaway Inc. Class B Report, a holding company of diverse business albeit more industrial and consumer focused than the technology laden one that is Alphabet. Anyone who's read the Berkshire annual report knows there are many moving parts to the company, just like at the company formerly known Google.
The argument put forward is the company is looking to offer greater transparency to the where and how it generates revenues and earnings, which is a growing trend among companies. We saw this earlier this year when Internet retailer Amazon (AMZN) - Get Amazon.com, Inc. Report broke out the results of its cloud-computing business, but candidly Google's step goes far further.
While there are benefits to be had as the former Google shifts to a company of companies mentality inside Alphabet, including greater leeway at the operating level to react more quickly to industry dynamics, as well to allow investors to zero more closely in on the performance of the core Internet search business.
One of the downsides of this move, however, is all the warts associated with the new operating structure is will also show how all the other businesses are performing. Read that as businesses that are vast consumers of resources, potentially ones that are far from earning their cost of capital and are a drag on Alphabet bottom line earnings. Of course, the new structure will allow Wall Street to better appraise Alphabet shares through a sum of the parts valuation, which builds up the intrinsic value in a company's share price by determining the value of each business.
In this world of activist investors, one has to wonder how far down the road it will be until they start to petition Alphabet to spin out the Google business? You can already hear the spinout arguments that were to separate Synchrony Financial (SYF) - Get Synchrony Financial Report from General Electric (GE) - Get General Electric Company Report, W.R. Grace (GRA) - Get W R Grace & Co Report and GCP Applied Technologies, and Baxalta (BXLT) from Baxter (BAX) - Get Baxter International Inc. Report. Will it be a year, two or three of culling through financial reports and running various analyses to build the argument that a stand-alone Google is better off? Time will tell.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned. Versace manages a portfolio that owns shares in FB.
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