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1 Number To Watch in Alphabet's Earnings Report

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) could deliver its worst quarter on record when it turns in second-quarter earnings results after hours on Thursday.

Analysts expect earnings per share to fall by nearly half, and revenue to slip 4%. Advertisers have pulled back on spending during the pandemic, especially in the lockdown period earlier in the quarter, and eMarketer forecast Google's U.S. ad revenue to fall by 5.3% for the year.

While investors are sure to watch Google's advertising figures closely, as well as results from YouTube, there's a more overlooked corner of Alphabet's quarterly results that deserves increased focus from investors: Other Bets.

This is the collection of "moonshot" businesses that includes Waymo, the self-driving car startup; Access, the Google Fiber parent; and GV, Alphabet's venture capital arm, among others. Five years ago, when Google announced that it was rebranding as Alphabet to give investors more clarity into its startup businesses, investors cheered, sending the stock up 4%. Since then, though, the moonshot segment has increasingly looked like a disappointment.

A Waymo autonomous vehicle

Image source: Waymo.

Other bets are looking like busts

Last year, Alphabet brought in $659 million in revenue from Other Bets, up from $595 million the year before, primarily from Google Fiber and its Verily Life Sciences division. However, the company poured billions of dollars into those businesses and finished the year with an operating loss of $4.8 billion, significantly higher than its $3.3 billion loss in 2018. In the first quarter, Other Bets revenue actually slipped from $170 million to $135 million in the first quarter, and it posted a $1.12 billion loss, compared to an $868 million loss in the quarter a year ago.

Alphabet is one of the few companies that can afford such an extravagance, as its Google segment generated $41.7 billion in operating income last year. But with widening losses in other bets, the segment deserves more scrutiny. There are other signs that the moonshot businesses may not be reaching their potential. Waymo, considered the most valuable of the other bets, was estimated to be worth $175 billion in 2018 by Morgan Stanley during the heady days of autonomous vehicle technology. However, earlier this year the startup raised money at a valuation of just $30 billion. Similarly, Google Fiber has essentially stopped expanding its broadband service after launching in just a handful of cities, despite the service's being generally well-received.

Management has said that it continues to invest in other bets with a long-term focus and in businesses that will complement its core Google operations, but it also plans to "sharpen its focus" on metrics and milestones related to financial performance -- which may include seeking more outside investment, as it's done with Waymo and Verily.

With Google's core ad business challenged by the pandemic and the recessionary climate, the other bets division takes on more importance, as it could help mitigate Alphabet's falling profits. Even in a healthy economy, the digital ad market is maturing, meaning Google will need to find other growth drivers -- which seemed to be the original purpose of other bets.

Keep an eye on the figure when the company reports earnings on Thursday. Investors should hope to see an increase in revenue and slowing growth in operating losses, as well as signs that the company is tightening its control over some of those projects. While Alphabet has seen progress in experiments like Waymo, Wing (its drone delivery service), and Loon (its internet balloons), management may need to be more realistic about which projects can actually become profitable one day if other bets are truly going to deliver shareholder value.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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