Posts Tagged 'GOOG'

Expanding into New Markets (GOOG)

One of the reasons that we keep harping on Google as a stock to purchase has to do with their ability to be a disruptive force in almost every market they enter. They are able to do this because their goal as a company is different from most. Specifically, a typical company is attempting to get their clients to spend money on their product. Google, on the other hand, is only looking to drive its advertising business. As such, they can offer a variety of (sometimes costly) services for free (or close to free), thereby destroying the business models of many embedded companies.

That is the theme of this article from The Choson Ilbo. The following quote is regarding the implementation of the Nexus One and its unique bypass of cellular providers:

This is expected to change the very landscape of the mobile communications industry. The days of mobile operators controlling prices will likely come to an end soon. With customers able to freely choose the cheapest service, telecom companies will see their role shrink to mere suppliers of cellular networks and their profits drop accordingly. As companies like Apple and Google expand into the handset market with their own software, existing handset manufacturers will see their powers diminish as well. In 2009 Samsung and LG Electronics boosted their shares of the global cell phone market to the 30-percent level for the first time and pulled in record earnings. But they account for no more than 5 percent of the world smartphone market. They may be riding high now, but there is no telling when they might be knocked out of the saddle. The only way to survive is to innovate, innovate, and innovate.

Sometimes the most important aspect of an event is lost in the hoopla. Everyone is/was very excited about the technological implications of the Nexus One, but the reality is that the long-term ramifications of Google into the handset market might be what people are still talking about years from now. As we alluded to earlier, Google isn’t really giving wireless providers a choice as far as adopting Android devices. In order to remain competitive in the short-term, these companies must accept Android devices – even while the long-term path continues to push cellular telephony more to the peripheral as internet telephony becomes the tool of the day.

Can cellular companies remain relevant? Just the fact that we can legitimately ask this question speaks to the power of Google’s (and Apple’s) ability to disrupt and to innovate.

Welcome to a new week with Invest Smarter. This week we’ll (finally) post Part III of our Google analysis, continue to cover relevant news to our investing ideas, begin an “Investment 101” series designed to get less experienced investors up to speed, and, if there is enough time, initiate coverage on our third stock.

As always, thank you for your readership.

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The Effect of the Nexus One on Google’s Margins (GOOG)

The Wall Street Journal blog has a good summary of Goldman’s analysis of the effect of the Nexus One on Google’s margins.

Now for the bottom line. Goldman guesses that the hardware cost of making the $530 phone is about $300, which it will pay to HTC. So from the remaining $230, take away $50 per unit for warranty, after-sales service and R&D expenses — which HTC will cover apparently. Then take away HTC’s $75 profit cut. That leaves $105, from which Goldman subtracts an estimated $50 for Google’s R&D and marketing expenses. That leaves Google with about $55 for each phone it sells, a margin of about 10%. That would add at most 2% to Google’s earnings before interest and tax, a basic gauge of operating profit.

I’ve seen estimates for Nexus One sales as high as 5-6mm in 2010, but I think it’s safe to trust a Goldman analyst to have done his homework on these estimates. Based on the hype surrounding the phone, I think a modest beat of 3.5mm is reasonable – if Google is able to sell closer to 5 million phones, however, that does result in an EBIT (Earnings Before Interest + Tax Expenses) increase of $275mm.

That said, I think relying on this analysis misses the forest for the trees. The Nexus One may sell well, it may not. 3.5 million phones in your first real attempt at hardware sales is impressive, but Google has their eyes on a different prize: getting non-smartphone users hooked on the flexibility that constant access to the internet can provide. The chart below is what Google is really paying attention to, and the Nexus One is just one way to get more people more connected to the internet.

(Picture above can be found at www.abovethecrowd.com)

Best Google vs. Apple Piece Yet (GOOG, AAPL)

An absolutely great article by Bill Gurley about Google vs. Apple can be found here. His point of view aligns very perfectly with what we’ve been writing about here. Do yourself a favor and read the entire thing, but in the meantime, my favorite portion is blocked below for your convenience:

If Apple’s business model is aggressive relative to the carriers, in contrast Google’s seems unrealistically accommodating. You want to control the user interface? No problem. Want access to the code? We’ll make it open source. What kind of economics do we want? Nothing at all.  What the hell, we will pay you!  That’s right.  Google will give the carrier ad splits that result from implementing the Google search box on any Android phone. FBR Capital Markets suggests that Google is taking this idea one step further in its November 24, 2009 report titled Implications of a Potential Share Shift to Android-Based Wireless Devices. “Recent support for Android-based devices appears to be correlated with significant up-front financial incventives paid by Google to both carrier and handset vendors.” FBR goes on to suggest that these incentives may be as high as $25-50 per device. This is simply an offer that no carrier can refuse, particularly when U.S. carriers are currently in the habit of paying $50-150 per handset sold in subsidies

Simply, Apple entered the cell phone market by creating a phone so good, that every high end mobile phone purchaser wanted one. This has been a wildly successful strategy. Contrary to this, Google is entering the cell phone market by creating a phone that is also very, very good, but it’s adding a few wrinkles: it is accommodating to the present hierarchy.

Will it remain so accommodating in the future? It is naive to think that Google doesn’t see an opportunity somewhere down the road to bypass the cell-phone carriers altogether, but in the meantime, this is a palatable alternative to cell-service providers that allows the 99% of cell phone users who don’t own an iPhone to access an open-source, technologically advanced phone that major telephone companies will sell due to the favorable terms Google is offering.

So What Just Happened? (GOOG)

If you have some time to peruse a great summary of the new features that Android 2.1 and the Nexus One are bringing to the world, head on over to the Lifehacker summary found here.

It doesn’t discuss any of the implications of these moves, but it does go over some very neat features that we’ll start seeing immediately. Most notably…

  • Voice to text programming for all aspects of the phone
  • Continued great GPS
  • Absurd customizability

Couple this with the news that GOOG’s main smartphone competitors saw their stocks take an immediate tumble, and you can start to see that investors are recognizing at least part of the appeal of a Google-approved Android device.

Happy Nexus One day 🙂

New Idea: Google (GOOG) Part II

Market Sentiment

As I alluded to in Part I of the GOOG write-up, Google is a company that the market has responded very favorably towards. It has a historical P/E Ratio of 40 at the moment, with a forward looking P/E Ratio (using consensus analyst estimates found on ETRADE) of 24.44. What this means is that, unsurprisingly, the market sees GOOG as a high growth company with a lot of potential. However, when you look at analyst projections, you can’t help but notice a trend in their forward looking earnings estimates:

Q4 2009: 6.42

Q1 2010: 6.36

Q2 2010: 6.25

Q3 2010: 6.61

GOOG earnings projections are relatively static for the coming year. This is coming despite some legitimate new revenue sources that GOOG has been extremely optimistic about. One reason for the static nature of forward looking revenues can be found in an earlier post on the blog. Please refer here for the full text of our analysis, and here for the link demonstrating analyst skepticism of GOOG’s ability to penetrate the hardware market. Essentially, analysts have examined the Nexus One and its potential impact and found themselves unimpressed so far.

But all is not lost when it comes to alternative revenue streams! Taken from their Q3  2009 earnings transcript is the following quote from Google CFO Patrick Pichette (full transcript of the earnings call can be found here) in regards to whether or not mobile search might cannibalize their core desktop/laptop search:

“I think that the most exciting thing about mobile is that even though there may be on the margin some stuff that is kind of overlap, it’s essentially a new space. And because it’s a new space and there has been a lot of research done on this, and there was one, for example, there was one research that I read not long ago where by the end of 2011 or the end of 2012 that the research talks about smart phones surpassing the global PC in sales.

So you end up in a world where like it’s an “and” world rather than an “or” world where you live very differently with your mobile device than the PC.”

An additional useful comment came from Jonathan Rosenberg, Google’s Senior VP of Product Management regarding the difference in mobile advertising versus desktop/laptop advertising:

“I think the other thing we’re seeing is that display seems to work very well on some of these devices and I think that’s because of the level of engagement that a user has when they’re staring at a cell phone and actually seeing a display ad. They tend to notice it more, and unlike when they’re on a desk top machine, they’re less like to click away from it. So there’s much more of a dynamic of forced engagement with display. So I think we’re quite optimistic there about AdSense on the high-end mobile devices.”

Now perhaps I am jumping the gun on Part III of the analysis here, but we can start to see some of the divergence between GOOG executives and analysts. Google is clearly seeing fantastic growth opportunities in the mobile sector in fiscal year 2010, in addition to the core growth they have demonstrated every quarter as they have mastered internet advertising. Now, as stated above, the market is clearly seeing fantastic growth opportunities with their forward looking P/E Ratio over 20, but this profit growth seems tied to GOOG’s ability to continue to perform well with search advertising. In Part III of the analysis, I’ll examine why it is my fundamental belief that GOOG is poised to not only continue the growth they’ve demonstrated with Adsense, but find new markets for Adsense that have the ability to increase GOOG’s profit drastically.

Analysts Reserved Heading into Nexus One Launch (GOOG)

As expected, analysts are remaining cautious regarding GOOG even as the tech world is abuzz regarding the potential of Google’s new phone, the Nexus One. Key quote from the blurb on GOOG:

“Despite the excitement, we wonder how more aggressive pursuit of the hardware side of the mobile market will affect GOOG’s business model,” wrote Kessler.

Analysts are correct to remain hesitant – GOOG is a company with practically no hardware experience getting involved in the smartphone industry well after Apple has achieved total dominance. Additionally, the Nexus One is looking less like THE SMARTPHONE and more like a smartphone. I remain very optimistic about GOOG and their plans for telephony. I think all signs point to an eventual transition to the internet as phone provider, which is a domain where GOOG is holding all the cards. Could the Nexus One launch be a disappointment? Of course. But this is a plan that really only has upside for GOOG, and for every percentage increase in market share Android gains versus the iPhone, GOOG will find additional revenue.

Google Chrome Passes Safari in Web Browser Market Share

Article can be found here. It isn’t surprising that Google Chrome passed Safari, but it is surprising how quickly Google Chrome passed Safari. Block quote below for your convenience:

“It doesn’t look like a lot when you’re talking about a fraction of a percent, but when you consider thatlast month Chrome only had 3.93% you can see just how quickly it’s being adopted. Last month was actually Chrome‘s biggest leap since its launch, which probably has something to do with Google‘s current large-scale advertising campaign. PC World speculates that the large surge could also be due to the Mac and Linux Chrome Beta releases last month.”

Expect market share to grow for GOOG, with a big surge coming once the Google Netbook is released in Q4 2010. Google Chrome is streamlined to work with Google Apps, so it stands to reason that increase in market share can/will result in an absolute return in their bottom line. The market sentiment portion of the GOOG writeup will be available later today.