Google's moonshot businesses could be losing as much as $4 billion a year

Google's moonshots and other non-Internet-related businesses could be losing up to $4 billion a year and risk having a negative value when they are spun out into separate businesses under the Alphabet holding company, according to a new note to investors by Bank of America Merrill Lynch.

Google is preparing a massive corporate restructuring that will separate Google's core internet businesses (search, YouTube, Android, etc) from the various other businesses that Google has spent the past few years investing in, such as high-speed broadband, Nest smart home devices, and healthcare. The various businesses will now operate independently and be folded into a parent company called Alphabet. Google's stock will also convert into Alphabet stock.

Minimal revenue

Google's core Internet search business is a cash cow.

But only a few Alphabet businesses - namely Nest, Dropcam and Fiber - currently generate any revenue at all, according to BofA Merrill Lynch analyst Justin Post. He estimates that those businesses will bring in about $500 million in revenue in 2016 with about $100 million to $150 million in gross profit.

The rest of the Alphabet businesses, many of which are still in early stages - such as the self-driving cars that are part of Google's X lab - are bleeding red ink.

Post uses two different methodologies to estimate how much money the Alphabet businesses are losing:

In the first scenario, Post assumes Google's core businesses had adjusted operating margins of 53% (as it did in 2010, before Google had really started investing in moonshots), and YouTube has margins of 15%.

With those assumptions, he estimates that non-core Google businesses could be losing up to $4 billion a year.

He comes up with a smaller number by looking at job listings. By analyzing five years worth of Google job postings and concluding that roughly 16% of new employees work on core Google versus Alphabet businesses, Post estimates that the Alphabet businesses could be losing up to $2.7 billion a year.

Negative value

Whichever number you go with, the Alphabet businesses are losing billions.

Still, Post said, the Alphabet reorg should boost the stock. The reorg will help Wall Street value Google (or, Alphabet) on a sum of the parts basis, resulting in a higher earnings estimate for core Google, giving more consideration to the company's massive cash pil,e and likely giving a positive value to the other Alphabet businesses. All told, the restructuring could boost Wall Street analyst price targets on the stock by $50 to $150 a share, Post estimates.

But Post notes that it's also possible that Wall Street assigns a negative value to the non-Google Alphabet businesses, and he says that BofA Merrill Lynch is using $0 value in its model.

Interestingly, while Google has said the Alphabet reorg will happen by year's end, Post says he expects the split to happen in January 2016.