This is an insane amount of money to spend on a start up. My estimate is that $3.2B is more than 20X earnings. So why does Google think that is worth $3.2B?

Nest has reported 100% growth in both 2012 and 2013. In order to sustain that growth, they must have a great product roadmap. It is likely that they will introduce products in other categories that will bring technology to stale products in the same way that they have reinvented the thermostat and smoke detector. Nest has been piling up patents covering everyday products. With Google’s funding, Nest can accelerate product development and also grow internationally.

On the energy side, Google may see huge potential value from their EnergySense program that allows Google to act as an energy aggregator, bidding DR directly into ISO/RTO energy markets, bypassing utilities. (The details of the EnergySense program have not been confirmed. This is my conjecture.)

The biggest unknown that Google, like no one else, understands is the value of data. Google already has a social graph of users. They understand a consumer’s likes, dislikes, and behaviors from email, search engine queries, web tracking, and social networks. Combining user data with product data that provides even greater insight into users creates even more value. Google’s business is built on extracting value from big data.