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February 1, 2016

A first look into Google's big, secret, risky bets

Alphabet is about to pull back the curtain just a bit on its some of its most secretive businesses.

For the first time in its history, Google's parent company is going to reveal the sales and profits (or losses) for its experimental and "moonshot" initiatives, including Google Fiber, Calico, Nest, Verily, Google Ventures, Google Capital and X.

But don't expect to get much detail about them. Alphabet is going to bundle all those experiments together into an "other" category when it reports its fourth-quarter finances Monday afternoon.

Trying to make sense of Alphabet's "other" category will be like watching a movie right after getting your pupils dilated -- you'll get a rough idea about the overall picture, but you won't see any of the individual components with much clarity.

Wall Street analysts aren't expecting much from the "other" group. Estimates vary, but most believe the group was a money loser -- some even think its losses could be in the billions of dollars.

But shedding some light on all those riskier bets will give investors a clearer view of the core Google business. As Google has poured earnings from its search business into its experimental endeavors, shareholders have lacked clarity about how search sales are translating into search profit.

When it reports its finances, Alphabet will provide investors with sales and losses for all of its "other" companies going back to 2013. That transparency is getting a big thumbs-up from shareholders.

Alphabet is up 15% since it announced its restructuring, making it one of the tech sector's best-performing stocks over that period. It's even within striking distance of overtaking Apple as the most valuable company on the stock market, trailing Apple only by about $20 billion.

That means Google could surpass Apple with just a 3% rise in its stock price (assuming Apple's shares stay the same).

Colin Gillis, analyst at BGC Partners, believes that Alphabet is on pace to become the stock market's first $1 trillion company in a few years. That's a level that as recently as last year a handful of analysts thought only Apple could achieve.

Never before has there been so much focus on a company's "other" section of its quarterly financial report.

But the core "Google" business is expected to have produced a remarkable quarter itself.

SalesFourth quarter of 2014: $14.5 billion Fourth quarter of 2015 forecast:$16.9 billion, up 17%

Alphabet is set to post record sales in the fourth quarter after growing at a tremendous pace, according to a survey of analysts conducted by FactSet.

It now has six products with more than one billion customers, including Search, Maps, YouTube, Chrome, Android and Google Play, Gillis noted. Gmail could soon be added to that list: It has 900 million customers.

Profit2014: $4.8 billion 2015 forecast: $5.7 billion, up 19%

Just as sales are expected grow to record levels, earnings too are forecast to hit an all-time high.

Growth in paid clicks2014: 14% 2015 forecast: 21.8%

Google makes the bulk of its money when people click on ads served up on its website and partner sites. Those clicks are forecast to have grown by nearly 22% in the past quarter.

Decline in cost per click2014: -3% 2015 forecast: -6%

The amount that advertisers pay Google for each click has been on the decline for years. That's happened as advertisers shift to mobile advertising, which tend to cost less than desktop ads.

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