An Easy Cash-Grab for Google Stock
Most people think the smartphone boom is over, but a new report suggests that Alphabet Inc (NASDAQ:GOOG), also known as Google, can still squeeze a little more growth out of the sector.
The “Pixel,” its new high-end smartphone, is expected to be a cash cow in 2017. For instance, analysts at Morgan Stanley’s (NYSE:MS) research division think that Google will sell five to six million smartphones next year. It will be a massive haul for the company and Google stock, bringing in $3.8 billion from the product release.
The trend is already underway. Google is on track to sell three million Pixels before the end of the year, at least according to the preliminary data. Since the phones retail between $649.00 and $869.00, the company could eke out $2.0 billion of revenue this quarter alone.
These profits are in two parts, and could be a huge tailwind for Google stock. (Source: “Morgan Stanley thinks the Pixel smartphone will generate Google almost $4 billion in revenue next year,” Business Insider, November 28, 2016.)
Dozens of manufacturers use “Android” as their native operating system (OS), which is how it became the dominant OS in the world. Samsung Electronics Co. Ltd. (NASDAQ:SSNLF), HTC, and LG all built smartphones around the Android OS. Although Google provides this platform for free, it monetizes each Android user in other ways.
Creating Android as an open source platform was prescient of Google, but this cash surge has another component. Namely, that Pixel is a hardware product made by Google, much like the “iPhone” is built by Apple Inc. (NASDAQ:AAPL). That is the parallel that most investors are missing.
That being said, the Pixel won’t be nearly half as profitable as the iPhone. For one thing, it won’t sell as many units. Apple sold 212 million iPhones in 2016, a number which markets considered disappointing. Analysts were actually disappointed with the company’s $137.0 billion in revenue.
Second, Google’s use of high-quality materials has eaten into its gross margins. Only somewhere between 22% and 25% of its revenue will make it past the company’s top line. By contrast, Apple has gross margins of 41%. At one point, it even had 57.7% margins.
Nonetheless, the new Pixel-related revenue is unexpected and could help buffet the price of Google stock (GOOG).