Earlier this week, Google (NASDAQ:GOOGL) made headlines with news that it’s spending over a $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.
While Google was rather tight lipped on the event, more insight was had from the NASA press release that said 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 will 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 down 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 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 venture capital-like spending mentality, I’m not clear exactly on just how spending on space and robots is going to help its core search and advertising business or otherwise generate shareholder value. Like most venture capitalists maybe Google is 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 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, which as an arguable use case has yet to find its legs. Perhaps Google is looking to emulate Amazon (NASDAQ:AMZN) and its increasingly controversial venture capitalist-style R&D.
Of course there is the other question as to what it would take for a new business to really put a dent into the company’s sales and profit generation machine that is search and advertising. When Google’s profit and loss statement is put under the microscope we find that search and advertising account for 92% company’s sales so far in 2014. With more people getting connected through more devices, it seems that business has ample runway ahead…unless privacy truly becomes an issue.
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. By comparison, Apple, (NASDAQ:AAPL) has done an excellent job of staying focused on the type of innovation that will deliver long-term shareholder value. Even though Apple has the cash to fund many a project, it continues to refine and improve its core products and aims to carefully add complimentary products when the market and ecosystems are ready.
When looking at companies to determine whether or not to invest in them, there are a number of factors to consider and as I've shared with my students at the New Jersey City University School of Business I tend to focus on 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 ROI, odds are it’s the shareholder’s that will be left holding the bag.