How Google’s Branching out Could Harm Core Investors

Chris Versace
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Posted: Nov 22, 2014 12:01 AM
How Google’s Branching out Could Harm Core Investors

I appeared on “Money with Melissa Francis” last week on the FOX Business to talk about Google (GOOGL). The search engine company made headlines with news that it’s spending more than $1 billion to lease an old NASA hangar on a historic Navy air base for a 60-year period. More specifically, the Internet search company is leasing a 1,000-acre site that is part of the former Moffett Field Naval Air Station on the San Francisco Peninsula in California.

While Google was rather tight-lipped on the event, more insight was had from the NASA press release that announced a Google subsidiary called Planetary Ventures LLC will use the hangars for “research, development, assembly and testing in the areas of space exploration, aviation, rover/robotics and other emerging technologies.”

The same press release stated Google would invest more than $200 million to refurbish the hangars and add other improvements, including a museum or educational facility that will showcase the history of Moffett and Silicon Valley. It should be pointed out that this is not the first lease Google has taken on the former air base – it’s where Google executives keep their private jets, and it has been mentioned as a possible location for a second Google campus.

From an investor’s perspective, I can understand the company’s desire to stake out additional space as part of strategic expansion plans. What is much harder to swallow is the “research, development, assembly and testing in the areas of space exploration, aviation, rover/robotics and other emerging technologies.”

While I may not be in tune with the venture capital-like spending mentality, I’m not clear exactly on just how spending on space and robots is going to help Google’s core search and advertising business or otherwise generate shareholder value. Like most venture capitalists, Google leaders may be hoping to generate a windfall from one or two developments that will not only pay back its investment, but also branch out the core business.

If so, it’s hard to see evidence of that upside, given some of the initiatives thus far – driverless cars, the Atlas robot created by Google-owned firm Boston Dynamics, home automation, Google Fiber, face recognition technology that is being used with Google’s Picasa, cancer-detecting pills and others. Even Google Glass has yet to find its legs as a compelling and needed capability.

When I see a company straying from its core businesses in ways that are not obvious value generators, I tend to get a little worried. I remember companies like the former Three-Five Systems, a display manufacturer that rode to prominence in 2000 with Motorola as its core customer. Despite that success, in 2003 the company spun off its LCD display business to Brillian Corp. and began to specialize in electronics manufacturing services before filing for bankruptcy in September 2005 after struggling for a few years. That disaster showcased a management team that lacked vision and a viable strategy.

When looking at companies to determine whether or not to invest in them, there are a number of factors to consider. As I’ve shared with my students at the New Jersey City University School of Business, I tend to focus on PowerTrends, of course, but also products, strategy and management. Perhaps the rather heady performance of many tech-sector stocks is reigniting some of its hubris from the past and has executives drinking a tad too much of their own Kool-Aid. But if these wild adventures don’t generate incremental return on investment (ROI), odds are it’s the shareholders that will be left holding the bag.

In case you missed it, I encourage you to read my e-letter column from last week about when the Federal Reserve will make its next move.