Google‘s fundamental business and portfolio of moonshot projects will remain the same when it changes its name to Alphabet, but investors are rallying around the prospect of getting a more detailed view of the tech giant’s business and how it makes money, analysts said Tuesday.
Shares of Google Class C stock were up more than 4 percent Tuesday morning, a day after the company announced it would overhaul its operating structure and undergo the name change.
Markets are responding to the prospect of greater balance-sheet accountability and the chance that Alphabet will spend slightly less money on speculative endeavors, Tigress Financial Feinseth Partners CIO Ivan Feinseth said before the start of trading Tuesday.
“They’ll report line items for advertising revenue, search revenue, YouTube revenue. So you’ll be able to have more granularity in their different business lines to see where the real growth is and where the real drivers are,” Feinseth told CNBC’s “Squawk Box.”
Investors are essentially saying they want greater transparency into capital spending, he added. That sentiment is already reflected in shareholder approval following Google’s latest earnings report under new Chief Financial Officer and former Morgan Stanley executive Ruth Porat, he said.
Nomura senior analyst Anthony DiClemente said the bullishness among investors was not simply a matter of over-rewarding Google for sharing information it had previously obscured. Instead, the positive sentiment is part of a broader theme of capital management Porat.
That theme encompasses greater care for resource allocation, keeping a lid on headcount and improving margins, he told “Squawk Box.”
Google announced Monday it would restructure its business as a collection of companies under the banner of Alphabet. The largest subsidiary under the new company name will be the core Google search and advertising business.
Android, Maps, and YouTube will also remain under the umbrella of Google.
Piper Jaffray analyst Gene Munster said he believes breaking down Google’s core search unit, which accounts for about 90 percent of its business, will show it is about 10 percent more profitable than investors think. The stock should get a 5 to 10 percent lift from the revelation, he added.
That impact will likely materialize after the change goes into effect at the close of the December reporting period, he said.
Mark Mahaney, lead Internet analyst at RBC Capital Markets, said the market fears Google’s core search business is on its way to being stuck in single-digit growth, but RBC believes the company is more likely growing in the low the mid-teens.
“It matters because the longer they can sustain that low-to-mid-teens growth in its core advertising business—which is so highly profitable—it just gives it greater long-term growth opportunities,” he told CNBC’s “Squawk on the Street.”
However, Mahaney said he was not certain Google would break out metrics to confirm that.
RBC expects Google to report gross margins of 51 percent before certain expenses for 2015. Stripping out the $4 billion to $5 billion the firm believes Google invests in experimental projects, core business margins may improve to 55 to 57 percent.
While accountability is the story of the day, the restructuring will create the more sustaining change, Munster said.
Google’s endeavors such as Life Sciences, which is developing high-tech contact lenses, and Calico, which focuses on extending human longevity, will be treated as separate businesses, as will Nest, the smart home hardware firm Google bought in 2014.
Google said each of those companies would be operated by a separate management team. That “proper management structure” will be good for these projects, Munster said.
“It gives investors a sense that all these projects they don’t know a lot about are in better hands and better focus, and that should provide a better opportunity for some of these projects to be more sustainable to the overall business. That has a longer positive impact on the stock,” he told “Squawk Box.”
Quarterly earnings-per-share numbers will represent total profit for Alphabet, but Feinseth said investors will theoretically be able to break down the contributions from each business unit.
Google faces a number of challenges to its core business and must be steady for dramatic advances in technology, said Jeffrey Sonnenfeld, professor and senior associate dean at the Yale School of Management.
The structural change helps Google prepare, but it also raises important management questions, he added.
Google co-founder Larry Page will serve as chief executive of Alphabet, while current senior vice president of products, Sundar Pichai, will become CEO of Google.
Factoring in Google Executive Chairman Eric Schmidt, co-founder and special projects director Sergey Brin, and Porat, there will be five strong voices of the company, Sonnenfeld said.
“Founders can have quite a restraining impact … how awkward it is if you want to challenge the model of a founder and they’re sitting right there,” he told “Squawk Box.”
“In a time of crisis or in a time of great invention, who is it that’s out there on the frontier?”
DiClemente said the new structure allows Pichai and YouTube CEO Susan Wojcicki to better focus on the performance of Google’s three major revenue drivers: streaming video, mobile search and advertising technology.
“Whenever you have greater internal organizational focus, it might actually make it so that they’re more motivated and incentivized to make those core businesses work in terms of the growth,” DiClemente said.
—None of the analysts or their families own shares of Google. Their firms do not hold greater than a 1 percent share of the stock and do not provide investment banking services to Google. Piper Jaffray makes a market in Google securities. RBC Capital Markets provides Google with noninvestment banking securities-related services.