Analyzing Google's Hardware Business Growth Prospects!

  • Google’s Chromebook has gained significant market share in the low cost laptops market.
  • If it takes off, Google Glass offers potentially high profit margins.
  • Given future prospects we think Google is attractive at current valuations.

Google Hardware Business Growth Prospects

Google (NASDAQ:GOOG) might have exited the mobile handsets business by selling off the Motorola unit, but its pursuit of smart wearable devices and intelligent hardware might just be the most interesting part of its business at the moment. We look at what Google has lined up in the hardware space and the impact it might have on its valuation.

Starting with the more conventional among its suite of devices, Google’s Chromebook which started off being dubbed as a ‘dead on arrival’ product, has now outpaced Apple’s MacBook to reach the second spot in laptop sales. The cloud based Chromebook syncs everything from your bookmarks and search history to your images, documents and contacts, on sign-in. The competitively priced Chromebook devices cost between $200-350 each, and reportedly account for 25% of the low cost laptops sold in the US.

The Chromebook has made significant progress since its launch in 2011. Google recently also announced its plans to launch 20 new devices over the coming months.

Just days before its Q1 2014 earnings release, Google announced its acquisition of Nest, a home automation company that has launched two products so far. Nest has churned out programmable, self-learning Wi-Fi enabled thermostats and smoke detectors. Both products have run into problems in the form of a patent infringement law suit and malfunctions respectively. However, with Google’s ever growing network of connectivity via the internet, Nest appears to fit right into Google’s scheme of things. Google obviously wants to go beyond desktops and mobiles and to reach every hardware device and power it with one or more of Google's services.

Further, with the acquisition of Nest, Google has acquired the services of the latter’s CEO Tony Fadell, a former Apple employee, and the man behind the iPod design.

Another one of Google’s devices that has been written off as a ‘too fancy’ product is Google Glass. The wearable computer/device comes with an ‘optical head mounted device’ (OHMD) which reflects projected images and allows users to see through it as well. The device allows users to navigate through the internet using voice commands.

The Google Glass device was made available to the public on 14 May 2014 at a price of $1500. If reports are to be believed, the Google Glass device costs Google only $150 to make, making it potentially very profitable. However, the device has met with a lot of apprehension and criticism and is far from being unanimously accepted. That said, it’s the kind of device that will always find some takers.

There’s also a host of other devices like the portable projector, Chromecast, and the video conferencing gadget, Chromebox and more that we will probably hear a lot more about going forward. Google is now working on an advanced tablet with infrared sensors, twin cameras and 3D imaging capabilities.

In March 2014, the company announced that by the end of the year, it will be launching the first of its ‘Android Wear’ range of wearable smart devices, a smart watch which will basically bring most part of your smartphone onto your wrist.

Google’s Future Outlook and Valuation

Google’s ‘other revenue’ which consists of revenues from sales of digital content and hardware like its Nexus devices, has been growing at a stellar pace. Though the segment’s Y/Y growth slowed in Q1 2014, the average of the last 4 quarters is impressive at 92%.

Q113

Q213

Q313

Q413

Q114

Google 'Other Revenue' $ billion

1.05

1.05

1.23

1.65

1.55

Y/Y Growth

150%

138%

85%

99%

48%

At a little over 10% of revenue, the segment might come across as being inconsequential. However, in absolute terms, Q1 2014’s segmental revenue of $1.5 billion, is nearly twice as much as Twitter makes in a whole year.

Google’s hardware business offers a big opportunity if it can sustain its current momentum. At $563.8 a share, Google trades at Price/Earnings and Price/Sales multiples of 29.5 and 6.3 respectively. Not very cheap at current valuations but definitely a good buy given the future promise it holds.

For those who seek growth and profitability without the jolts and shocks of high growth momentum stocks (aka momo stocks) like Twitter and Amazon, we think Google is a good bet. Further, its valuations are undoubtedly far more attractive. At its current price, our rating for Google is 3.5/5 and we remain bullish about its future prospects.

To see Google’s latest stock price movement, click here (NASDAQ:GOOG)

Show Full Article
5 2
Is this article helpful ?    


Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

show more

Comments on this article and GOOGL stock

Do share this awesome post