Other Bets

Other Bets is a term famously coined by Alphabet Inc. to categorize its portfolio of ambitious, long-term projects that operate outside of its main Google business. Think of it as a corporate treasure chest filled with futuristic ventures, from self-driving cars to life-extension technology. These are high-risk, high-reward endeavors that are not expected to be profitable in the short term, if ever. The genius of this structure is transparency. By separating these speculative “bets” from the core, cash-cow businesses like Google Search and YouTube, the company allows investors to clearly see the financial performance of its established operations. It prevents the massive, uncertain costs of these moonshot projects from muddying the waters and obscuring the profitability of the main business. In essence, it's a form of in-house venture capital, funding a collection of start-ups with the potential to become the next Google, all under one corporate umbrella.

Why would a corporate titan like Alphabet deliberately hive off its most exciting, futuristic projects? The strategy is surprisingly aligned with the principles of clear-headed investing and accountability.

By reporting the financial results for the core Google segment and the Other Bets segment separately, Alphabet gives investors a crystal-clear view of where the money is coming from and where it's going. You can easily assess the health and profitability of the search, advertising, and cloud businesses without the drag from the capital-intensive bets. This separation forces discipline; each “bet” is managed like a standalone company with its own CEO and performance metrics, creating a culture of accountability that is often absent in sprawling corporate R&D departments.

This structure creates a safe space for radical, “moonshot” thinking. Teams working on groundbreaking ideas are shielded from the immense pressure of generating quarterly profits. This freedom allows them to pursue long-term, world-changing innovations without fear that their funding will be cut during a tough quarter for the parent company. It’s a powerful way to institutionalize a start-up culture within a massive organization, keeping the spirit of innovation alive and well.

The portfolio of Other Bets is dynamic, with ventures being created, spun off, or wound down over time. However, some of the most well-known examples give a flavor of the ambition involved:

• Waymo: A leader in autonomous driving technology, aiming to revolutionize transportation with self-driving cars.
• Verily: A life sciences and healthcare company focused on using technology to understand and prevent disease.
• Calico: A biotechnology research company with the ambitious goal of combating aging and age-related diseases.
• Wing: An autonomous drone delivery service, pioneering a new frontier in logistics.

These are not small side projects; they are fully-fledged companies tackling some of humanity's biggest challenges.

For a value investor, the Other Bets concept is both a challenge and a fascinating opportunity.

How do you value a portfolio of companies that lose billions of dollars a year and may never turn a profit? Traditional valuation methods like the P/E ratio or DCF analysis are nearly impossible to apply. The future is simply too uncertain. This is where many investors get stumped.

The real insight for a value investor comes from applying a Sum-of-the-Parts (SOTP) analysis. The strategy is as follows:

1. Step 1: Carefully value the core Google business (Search, YouTube, Cloud, etc.). This part of the business is immensely profitable and its future cash flows are relatively predictable.
2. Step 2: Look at the total market capitalization of Alphabet Inc.
3. Step 3: Subtract the value you calculated for the core Google business from the total market cap. The remainder is what the market is implicitly valuing the entire Other Bets portfolio at.

Occasionally, you may find that the market is valuing the entire company for less than or equal to your conservative estimate of the core business alone. In this scenario, you are essentially getting the entire portfolio of moonshots—Waymo, Verily, Calico, and all the rest—for free. This creates a powerful margin of safety. You are buying a wonderful, cash-gushing core business at a fair price, with a free “call option” on a collection of potentially world-changing technologies. While most bets will likely fail, the success of just one could create immense value, providing a massive upside to your investment.