Alphabet (GOOGL) Shows Discipline

The company ended Loon, which aimed to bring the internet to remote areas

By
Lawrence Rothman
Lawrence Rothman
Full Bio
Larry is an expert analyst with over 20 years of experience analyzing equities and fixed income securities at buy-side, sell-side, and independent research firms. He earned his B.B.A. and M.B.A. in Finance at Baruch College, City University of New York and is a CFA Charterholder.
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Updated March 26, 2021

Last month, Alphabet Inc. (GOOGL, GOOG) decided to pull the plug on Loon, a project designed to bring high-speed internet service to the world's most remote areas. The idea was to build balloons that could carry the needed equipment to areas that did not have broadband access.

The company had been working on the project for nearly a decade before deciding to pull the plug. Originally part of Alphabet's Other Bets segment, it was a minor part of the overall business. While Loon was not a major revenue generator, the decision to end the program shows that Alphabet management appears more willing to part with money-losing non-core businesses.

KEY TAKEWAYS

  • Alphabet decided to end one of its higher-profile special projects.
  • Starting in its Other Bets division, the project to deliver internet service to remote areas was not a major source of revenue.
  • The Other Bets segment has lost money for some time, so this may signal that management is keeping a closer eye on the bottom line rather than funding "moon shots" for indefinite periods.

A Small Piece of the Pie

Investors know Google for its search engine and other products like Maps, Gmail, Android, and YouTube that draw a lot of users and advertising. These businesses are part of the Google Services and Google Cloud segments. Collectively, they are the Google business.

However, there are also non-Google businesses within Alphabet called Other Bets. These are typically far-flung, early-stage technologies that are high-risk, high-reward investments. This is where the company's Loon initiative emanated. The entire Other Bets segment generated $657 million of revenue in 2020, less than 1% of the company's $182.53 billion. Many projects have yet to generate revenue, however. The segment has consistently lost money. Last year's operating loss was $4.48 billion.

Significance for Investors

Alphabet's Google Services segment generates the bulk of the company's revenue, totaling $168.64 billion in the latest year. The unit also produces a profit, which came in at $54.61 billion in 2020. But the other two segments, Google Cloud ($5.61 billion operating loss) and Other Bets are not profitable. With the company not seeing a way for Loon to produce a profit in the foreseeable future, management is indicating that its patience in these projects is not unlimited.

The Bottom Line

While Alphabet will continue to take these high-risk, high-reward chances, this step shows that management is mindful that it has to see a payoff down the road. Already a hugely profitable company, if this is a step toward reining in unprofitable projects, that could be another feather in Alphabet's cap.

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