Business

Wall Street chafes as it waits for Google’s projects to pay off

A roof-mounted camera on a Google self-driving car at the Computer History Museum in Mountain View, Calif.
Jason Henry/New York Times
A roof-mounted camera on a Google self-driving car at the Computer History Museum in Mountain View, Calif.

SAN FRANCISCO — Google Inc.’s research arm, Google X, is called the company’s Moonshot Factory. One reason the company picked the word “moonshot” was to remind people to tackle big problems that may well blow up in their faces.

Last month, after years of promotion, Google ended a test of its Internet-connected glasses, called Glass. While the device seemed to have promising commercial applications in hospitals and on factory floors, its first pass at the consumer world was unsuccessful.

The very public failure points to a bigger question. After patiently abiding a steep increase in research and development spending on efforts that range from biology to space exploration, Wall Street is starting to wonder when — and if — Google’s science projects will pay off.

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“We want companies to continue to push the envelope, but there has to be some financial responsibility around that,” said Ben Schachter, an analyst at Macquarie Securities. “We have no real insight into what’s going on.”

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So investors are left to guess. Two years ago, analysts estimated that Glass sales would be $3 billion to $11 billion by 2018. Google’s self-driving car project, which faces huge technological and regulatory hurdles, has been called a $200 billion opportunity by Gene Munster, an analyst at Piper Jaffray.

“These are guesses at best,” he said. “Our price target is based on things that are tangible, but we say on top of that there are wild cards.”

The wisdom of financing wild cards would not be under question if Google’s core advertising business — which accounts for about 90 percent of its revenue — were roaring. But its growth, while still up about 20 percent from a year ago, has slowed.

Now, the focus is on more mundane issues like costs and profit margins. Research and development costs grew to about 12 percent of gross revenue last year, the highest since the company went public in 2004. That includes the majority of engineers and technical expenses at the company.

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The most unusual projects are at Google X, on the main company campus in Mountain View, Calif. Google X focuses on technologies that are likely to be five to 10 years away from being commercialized. Its leader, Astro Teller, whose business card reads “Captain of Moonshots,” is a polymathic computer scientist who moonlights as a novelist and used to manage a hedge fund.

In an interview, Teller said that his division’s responsibility was to produce financial results on par with what a venture capitalist might expect when putting money into a new company. “Because risk abounds, we owe a very strong return,” he said.

Google X’s best-known projects are Glass and the self-driving car, but inside there is much more, like an effort to make wind power with kites, or a project to deliver packages with drone aircraft.

And all across the Southern Hemisphere, the company has stratospheric balloons that aim to connect people to the Internet.

Add this to the list of things Google X has tinkered with — jet packs, hovering skateboards — and it is easy to see why investors are getting antsy.

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For Google, as for any company, innovation is no guarantee of success.

But for shareholders, whose patience is not usually as long as that of researchers, nothing is quite as reassuring as a shiny new product whose profits they can measure with each passing quarter. And if they cannot have that now, they would at least like to know when to expect it.