At Alphabet money talks, robots walk

Written by on March 18, 2016 in Guest Blog with 0 Comments

Happy kid playing with toy robotIt 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 percent of sales, some 200-300bp above where it should be.
  • I think that a large tech company should be spending a maximum of 5 percent 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.

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About the Author

About the Author: Dr Richard Windsor is the founder of Radio Free Mobile which is an independent research provider. The research helps clients to understand and evaluate the players in the digital ecosystem and presents a unique perspective on how all the pieces fit together in an easy to read and digest way. The product is available on a subscription basis and counts members of the handset, telecom carrier, Internet, semiconductor and financial industries as its subscribers. RFM is the land of the one man band meaning that Dr. W. also makes the tea. .


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