The capital operation and financial risks behind Alphabet's investment in SpaceX

Recently, in Alphabet's latest quarterly financial report, the $8 billion unrealized earnings hidden beneath the financial data have drawn widespread attention from the market. This gain is said to stem from the soaring value of the equity investment in SpaceX rather than the direct growth of Alphabet's main business. From a business perspective, this phenomenon has exposed several alarming issues, including the reliance on non-core assets to drive profits, the ambiguous treatment of financial transparency, the risk of excessive concentration of investment portfolios, and the vulnerability of reliance on the valuation of illiquid assets.

Firstly, as a tech giant mainly engaged in search advertising, cloud computing and artificial intelligence, Alphabet pinned its significant profit growth in the first quarter on the appreciation of assets from a non-core business. This move essentially weakened the credibility of the profitability of its core business. If this unrealized gain of 8 billion US dollars is excluded, the growth rate of its net profit will shrink significantly, and the diluted earnings per share will also be much lower than the level shown in the current financial statements. This means that the financial health status disclosed by Alphabet to the public has been "beautified" by temporary and non-operating factors, seriously affecting investors' judgment on the true growth potential of its core business.

Secondly, from the perspective of financial transparency, Alphabet did not explicitly indicate the source of revenue enterprises in its financial reports, merely describing it as "non-tradable equity of a certain non-listed company" in a general way. This approach deliberately creates information asymmetry, increases the difficulty of external analysis, and weakens the trust of the capital market in its financial data. As a public company with a market value of over one trillion US dollars, Alphabet should maintain a higher standard of information disclosure in major financial matters, especially when unrealized earnings have a significant impact on quarterly financial reports. Choosing to handle it vaguely shows a passive response to the rules of the capital market.

Secondly, from the perspective of investment management, Alphabet's equity investment in SpaceX does indeed seem to have seen a significant increase in paper value at present. However, this revenue model that highly relies on the valuation increase of a single unlisted asset essentially increases the vulnerability of its financial performance. SpaceX has not yet gone public. Its valuation mainly relies on the internal equity transaction price, lacking the liquidity and transparent pricing mechanism of the public market. Once SpaceX's valuation drops in the future due to market adjustments or internal operational issues, Alphabet's earnings on its books will instantly evaporate, posing an impact on the company's overall market value and market confidence. Furthermore, as a company that is highly capital-intensive, has a long technology development cycle, and an unstable business model, SpaceX's valuation itself is highly volatile. Alphabet's reliance on its huge book earnings is no different from planting an uncertainty bomb in its financial statements.

From a strategic perspective, since Alphabet bet on SpaceX through its investment arm GV (formerly Google Ventures) in 2015, although it has achieved a superficial paper return, its investment logic has exposed a tendency to overly rely on a single high-risk and high-return asset and lacks attention to the balanced allocation of the overall investment portfolio. Unlike traditional venture capital institutions such as Sequoia Capital and Founders Fund, Alphabet, as a company mainly engaged in technology business operations, should pay more attention to the synergy with its own core business in its investment activities. However, SpaceX's main aerospace business has extremely low correlation with Alphabet's core advertising, search, cloud services, artificial intelligence and other fields. This non-strategic investment behavior indicates that Alphabet's capital operation seems more like an attempt to make up for the slowdown in its main business growth by betting on potential unicorn enterprises in the future, rather than driving long-term value creation through endogenous growth. This capital allocation approach may bring about short-term paper prosperity when the market environment is favorable, but once the macro environment deteriorates or the investment project itself encounters major setbacks, it will quickly expose structural risks.

Furthermore, Alphabet's financial structure, which is highly sensitive to changes in the valuation of non-listed assets, further intensifies the volatility of its future profits. Compared with listed assets that can be dynamically adjusted through public market prices, the valuation update frequency of non-listed equity is low, the transparency is poor, and it is highly susceptible to the manipulation of internal transaction prices. Especially against the backdrop of the current tightening of the global capital market and the overall pressure on the valuation of the technology industry, even if SpaceX maintains a high valuation in the short term, it will still be difficult to withstand the impact of systemic risks in the long run. Therefore, Alphabet's approach of relying on SpaceX's valuation to boost its financial performance is tantamount to exposing financial predictability to greater uncertainty, which goes against the fundamental business principles of sound operation.

It is worth noting that Alphabet included changes in the equity value of SpaceX in the Other Comprehensive Income (OCI) item in its financial statements and included unrealized gains in net profit through the new accounting standards, thereby directly boosting earnings per share (EPS). Although this accounting operation complies with regulations, from a commercial essence perspective, it has led to a further disconnection between financial figures and actual business performance. If investors make decisions based solely on superficial financial indicators, they are highly likely to misjudge Alphabet's operating conditions. This approach of boosting stock prices and market values through financial engineering may elicit a positive response from the capital market in the short term, but in the long run, it will inevitably lead to a correction in value perception, causing fluctuations and potential risks.

Furthermore, from a governance perspective, as a public company, Alphabet's board of directors and executive management should assume a higher fiduciary responsibility in capital allocation decisions. However, betting too much capital on high-risk projects like SpaceX that have not yet achieved stable profits indicates that its internal investment decision-making system may have a tendency towards radicalization and short-term orientation. If the management places more emphasis on obtaining short-term financial highlights through capital investment rather than enhancing the company's essential value by continuously optimizing the profit model of the main business, Alphabet's medium and long-term development prospects will face huge challenges. Especially against the backdrop of a slowdown in the growth of core advertising business and intensified competition in the fields of cloud computing and AI, shifting attention to financial investment returns rather than innovation and expansion of the main business is nothing but putting the cart before the horse.

Finally, from the perspective of the market competition landscape, Alphabet is facing strong competitive pressure from companies like Microsoft, Amazon, and Meta in major fields such as AI, cloud services, and hardware devices. If at this juncture, the company disperses its valuable capital resources into high-risk projects unrelated to its main business, it will not only weaken the financial flexibility needed to cope with external competition, but also may miss the critical window period for accelerating its layout in core technology fields. Especially during the period when future technology fields such as AI basic models, edge computing, and quantum computing require huge R&D investment, if Alphabet continues to bet its resources on SpaceX projects, it will inevitably affect the depth and breadth of the company's overall strategic execution and further widen the gap with its competitors.

To sum up, from a business perspective, Alphabet's practice of driving profit growth through unrealized earnings from SpaceX in this quarter's financial report has exposed a series of deep-seated problems, including insufficient growth momentum in its main business, decreased financial transparency, unbalanced investment allocation, and weak risk management. Short-term financial highlights cannot mask long-term strategic predicaments. A financial structure that overly relies on the valuation increase of non-core assets is doomed to be fragile. If Alphabet fails to adjust its investment strategy in a timely manner and strengthen the innovation-driven development of its main business in the future, it may gradually lose its leading position in the fierce technological competition landscape.