Alphabet just reported its most profitable quarter ever, thanks in part to a booming IPO market and surging valuations for tech start-ups.
In its first-quarter earnings report on Tuesday, Google's parent company disclosed a net gain on equity investments of $4.75 billion, representing 22% of Alphabet's pre-tax income. Net income jumped over 160% to $17.9 billion, topping the prior record of $15.2 billion in the fourth quarter.
In addition to its dominant position in search and a growing cloud business, Alphabet has become a force in venture capital in recent years, using its hefty balance sheet to take stakes in companies of all sizes across internet and software as well as other industries where tech is playing a growing role. The company invests in start-ups through GV (formerly Google Ventures), and in later-stage and pre-IPO companies through CapitalG (formerly Google Capital).
Overall, the value of certain equity securities grew $4.84 billion during the quarter, offset by a loss of $86 million on other securities, creating a net gain of $4.75 billion. Alphabet didn't specify in its earnings report which deals produced the gains, saying only that the figure includes "gains and losses, unrealized and realized, on equity investments that we hold." Equity investment gains are recorded in the other income and expense (OI&E) section of its report.
A company spokesperson said in an e-mail that Alphabet doesn't break out the numbers by company.
The biggest single contributor was likely UiPath, the developer of automation software that went public earlier this month and is now valued at around $40 billion. CapitalG owns 30.5 million shares in UiPath, worth $2.3 billion as of Tuesday's close.
While UiPath's IPO didn't take place until the second quarter, the company raised a pre-IPO round at a $35 billion valuation in February, which was up from just over $10 billion in mid-2020. At that time, Alphabet's stake was worth about $1.9 billion, based on the share price that UiPath disclosed in its prospectus.
Alphabet doesn't have to wait for an IPO or acquisition to mark up an investment in its income statement. The company said in its annual financial filing for 2020 that for non-marketable holdings, it relies on "various valuation methodologies" to make "upward and downward adjustments to the carrying value of our equity securities as a result of observable price changes."
Similarly, payments company Stripe raised a financing round in March at a whopping $95 billion valuation. That's up about ten-fold from CapitalG's investment in 2016, when it co-led a $150 million investment in Stripe.
Among companies that held their stock market debuts in the first quarter, Alphabet's most notable investment is in Oscar Health, the health insurance provider that uses technology to expand access to coverage.
Alphabet owns over 24 million shares in the company, for a stake worth close to $650 million at the end of the first quarter. However, from 2018 to 2020, Alphabet invested over $450 million into Oscar, so its current gain is fairly muted.
As Alphabet's venture portfolio grows, so does the risk that its quarterly income can swing more dramatically based on market conditions. The company recorded a loss of $814 million on equity securities in the first quarter of 2020, as pandemic-related concerns brought activity to a halt. For all of 2020, its gain more than doubled to $6.3 billion from $2.8 billion in 2019.
Alphabet lays out the risk in a footnote on its earnings report:
"Fluctuations in the value of our investments may be affected by market dynamics and other factors, such as operating and financial performance of the companies we invest in, and could significantly contribute to the volatility of OI&E in future periods."
