Alphabet – Goodbye blue sky

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Money talks, robots walk.

• It looks like Alphabet has put its robotics venture, Boston Dynamics, up for sale because there is no immediate path to earning a return on the money invested for Alphabet.
• Boston Dynamics is a robotics company that specialises in robots that are autonomous as far as navigating and adjusting to their immediate environment.
• This means that they can move around with relative ease but how these robots could generate value for Alphabet shareholders is completely unclear.
• At the end of the day Alphabet is a data and analytics company whose objective is to categorise and understand every piece of digital information about users and to sell those insights to marketers.
• Every other piece of hardware that Alphabet makes from thermostats to internet balloons, have the capacity to collect huge amounts of data and thereby generate value to the core business.
• The robots of Boston Dynamics do not collect data about users.
• Instead they replace them making a business case around data extremely difficult.
• Consequently, it seems likely that Boston Dynamics will be more valuable to an owner with a different business model such as Amazon, DHL, UPS, Cainiao (Alibaba logistics) or even the military.
• Consequently, I suspect that there will be plenty of interest in purchasing this company but I doubt that Alphabet will book a huge return on the sale.
• This is an encouraging sign of greater fiscal discipline at Alphabet which I think has been lacking for many years.
• The arrival of Ruth Porat (CFO) from Morgan Stanley has triggered improvements but there is still one big nut to crack.
• This is the general and administrative expense which is still between 7 to 8% of sales, some 200-300bp above where it should be.
• I think that a large tech company should be spending a maximum of 5% of sales on GNA and in 2016E, RFM forecasts that Alphabet will waste around $2bn on excessive spending.
• This is a small improvement compared to the last 2 years but more still needs to be done.
• With the decision to sell Boston Dynamics being based on the economics of this company rather than blue sky, I have greater hope for progress on fiscal discipline.
• The immediate outlook for Alphabet looks good as my concerns around its ability to earn a return from Android (see here) are unlikely to impact Alphabet before 2017.
• Hence I can see Alphabet outperforming Apple in the immediate term, although I would also be considering Microsoft and Samsung as places to look for value.