R&D consumed 15.8% of revenues
Alphabet’s (GOOGL) R&D (research and development) spending has risen steadily over the last several quarters. In 2Q17, Alphabet’s R&D spending reached $4.2 billion. Considering that the company generated total revenues of $26.0 billion in 2Q17, R&D consumed about 15.8% of revenues generated in the quarter. R&D spending comprised ~15.7% of its revenues in 2Q17.
What’s driving up Alphabet’s R&D costs?
The chart above shows the trend line of Alphabet’s R&D spending over the last several quarters. The rise in R&D spending resulted from Alphabet’s increasing resource allocation to areas where it sees the most potential for growth. The company is turning more resources to R&D efforts aimed at bolstering its competition in areas such as cloud computing and machine learning.
Google, Alphabet’s largest and most profitable operating arm, has stated that it wants to focus its cloud computing competition on the quality of services. This focus overrides waging price wars with rivals such as Amazon (AMZN), Microsoft (MSFT), Oracle (ORCL), and IBM (IBM) to win clients. Alphabet is betting on artificial intelligence and machine learning to make it stand out in this hyper-competitive field.
Scaling back R&D spending in other areas
As Alphabet increases its R&D resource allocation to areas where it sees the most potential for growth, it has also scaled back spending in less promising areas as it tries to be more effective in resource allocation. In the spirit of trying to account for every dollar spent, Alphabet has shuttered or scaled down several experimental projects.