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Alphabet Just Plucked the Dandelion Out of its Vast Field

Zacks

Alphabet Inc. GOOGL has spun off geothermal startup Dandelion from X, the company’s “moonshot” division. Dandelion develops affordable geothermal energy systems to heat and cool homes and relies largely on drilling technology.

It will be established as an independent company outside Alphabet and launched in New York State. The company has raised $2 million in seed funding to beef up its expansion efforts in northeastern United States.

Alphabet reportedly owns some equity in exchange for funds, time and resources that it invested in Dandelion. It did not reveal the financial terms of the spin-off.

We believe Alphabet’s continuous focus on maintaining a healthy cash balance coupled with its technological prowess is contributing significantly toward driving up its shares, which have rallied 29.4% compared with the Zacks Internet-Services industry’s gain of 19.1% over the last one year.


Motive Behind the Move

While Alphabet has not been wary of making investments in areas that show real promise, it took some of the boldest decisions to curb down unprofitable businesses such as its decelerating fiber broadband service and drones. It also sold its imaging satellite business.

But with Dandelion, the motive seems to be a little different. According to Dandelion CEO Kathy, “Hannun drilling technology is not a core focus of Alphabet.”

However, we believe the end result to be the same, an improvement in cash from operations. Significant operating cash and a huge cash balance gives management the flexibility to pursue growth in any area that exhibits true potential. This flexibility, along with its technological prowess, allows Alphabet to pursue opportunities in different markets.

Alphabet Inc. Cash from Operations (TTM)

Zacks Rank and Stocks to Consider

Alphabet currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the broader technology sector include Etsy (ETSY), MiX Telematics (MIXT) and Alibaba (BABA), each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term expected earnings per share (EPS) growth rates for Etsy, MiX Telematics and Alibaba are a respective 20%, 20% and 30.4% respectively.

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