Google Investors Should Beg for a Breakup. Here's Why …
By all accounts, regulators are coming after Alphabet (GOOGL) with all guns blazing.
The Washington Post confirmed Friday the company received a civil investigative demand from the Department of Justice. More than 50% the state attorneys general are planning to investigate, too.
So-called privacy advocates are salivating at the chance to break up the Mountain View, Calif., company.
Shareholders should hope they get their wish.
Most people don’t understand Google. The popular perception is it’s a predatory advertising business that will use every advantage to sell more ads and crush the competition.
Google Maps, YouTube, Chrome and Android exist, so say critics, simply to help the company target its ads better.
It’s true that Google businesses collect a lot of data. And the company’s digital position is dominant. But narrowcasting this search giant misses the point …
That is, advertising is an application. The real business has always been machine learning — computer assisted, next-generation statistical modeling for problem-solving.
Google began 1998 as a grad project in the halls of Stanford University. Founders Larry Page and Sergey Brin had the bright idea they could design better algorithms to organize the world’s public information. Their system, called PageRank, was a solution to that math problem.
They built a better mousetrap. Users, and the big ad business, followed.
Today, nine products — including Search, Maps, YouTube, Chrome, Gmail and Photos — have more than a billion users. The attraction is simple. The platforms are mostly free, work well and are considered best-in-breed. Even better, they are constantly improving as Google’s algorithms get refined.
Meanwhile, Google collects even more data to train algorithms and find new applications.
A good example of this is Photos, a platform that passed 1 billion users just four years after its debut, according to Fast Company. Every day a billion photos — rich in metadata like aperture, location and camera type — are uploaded to the cloud service. Users can edit them, apply filters, and easily share them with friends and family for free.
The anonymized data teaches software engineers about exposure, color saturation, composition and the subtle human preferences that lead users to favor some snaps over others. The information has become the basis for advanced computational photography algorithms.
And every year, the fruits of that labor manifest in the best-in-class cameras found in Pixel smartphones.
It’s classic Google; doing more with the resources the company has, while thinking bigger. It’s also why shareholders should not fret about regulators.
Shareholders should have been tipped off way back in 2015 when Page penned a letter explaining a giant corporate restructuring. The new model left him as the chief executive of Alphabet, a holding company that included Google. He noted the company had really become a collection of data-driven businesses operating in disparate fields. Giving them independence would allow greater management scale.
Shareholders should have seen the move for what it was. Managers were laying the foundation for a breakup. They were getting ready to unlock value.
For example, Verily, its life sciences subsidiary, is using machine learning and data analytics to help clinicians, medical device and drug companies to make faster, more accurate diagnoses and develop new treatments.
The company raised $800 million in 2017 from Temasek, an investment company owned by the government of Singapore.
Two years later, CNBC reported the firm raised $1 billion, led by Silver Lake, a private equity firm.
Waymo, Alphabet’s self-driving car subsidiary, in March, began seeking outside funding, according to a report in The Information.
A December 2018 UBS report predicted the unit could earn $114 billion in sales by 2030 as it monetized taxis, its proprietary maps and autonomous vehicle operating system.
The investment research firmed pegged the value of Waymo at as much as $135 billion. Morgan Stanley, a rival researcher, sees the value closer to $175 billion.
YouTube is the undisputed leader in user-generated video content on the internet with 1.9 billion monthly users. The running stat sheet of accomplishments is staggering. The service is available in 80 languages, with local versions for 91 countries. Some 500 hours of video content get uploaded to the site every minute.
Alphabet doesn’t break out segment revenues. But Mark Mahaney, an analyst at RBC Capital Markets, estimates annual sales were $20 billion in 2018. That a company about 40% the size of Facebook (FB).
It’s one of the reasons, that Laura Martin, an investment analyst at Needham, believes a standalone YouTube is worth $200 billion.
A corporate breakup would set free these assets, along with others like Google Ventures — its investment arm that took early stakes in the likes of Tesla (TSLA), Slack (WORK) and Uber (UBER); Google Cloud; and Nest, the division behind its smart speakers, phones and security cameras.
These are real businesses with independent chief executives and incentive to become public companies.
Investors shouldn’t worry about regulators. Their angst might make for good headlines, but their prescriptions only help shareholders. The sum of Alphabet’s parts is worth far more than the current valuation.
For shareholders, the sooner the breakup, the better.
Best wishes,
Jon D. Markman
