When Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) launched the Google Pixel smartphone in September, it was widely dubbed an ”iPhone killer” by hordes of adoring Android fans. After all, GOOGL had stolen many plays from Apple Inc.‘s (NASDAQ:AAPL) playbook. Just like Apple, the company came to the fray with the Google Pixel and the Google Pixel XL with screen sizes of 5 inches and 5.5 inches, respectively.
But Google was not content to just copy a few iPhone moves. The marketing strategies employed by the two companies are remarkably similar:
- Both lay claim to being the smartest smartphones on the planet,
- Both claim to have the best cameras in their class,
- Both sport rather humdrum designs that are nevertheless pretty impressive par the course nowadays and,
- Both are pretty darn expensive, with the unlocked base 32GB versions starting and $649 for both smartphones.
GOOGL though has one-upped Apple by adding a touch of exclusivity to the Pixel to differentiate it from other Android phones. This includes special features such as a Pixel Launcher, Google Assistant and Daydream. By now, you might be wondering — what kind of affect does this have on GOOGL stock?
Not so Fast, Google Pixel
Not surprisingly, Google Pixel hit the ground running. Many GOOGL stock investors were willing to bet that the company’s first smartphone ever was on track to knock Apple down a peg or two after years of dominance in the smartphone business. Pixel managed to garner many glowing reviews, with The Verge declaring it ‘‘hit a homerun,” while Ars Technica described it as the ”best Android smartphone ever.”
But current indications are that the victory dance was a bit premature. Some numbers coming from Wall Street suggest that Pixel is unlikely to live up to the iPhone-killer hype. Morgan Stanley has come up with estimates that Google will sell a respectable 3 million Pixels worth $2 billion during the final three months of 2016, but only 5 million to 6 million for the whole of 2017 once the initial enthusiasm wears off.
Comparatively, Apple sold 212 million iPhone units in fiscal year 2016 netting $137 billion in revenue. Further, Apple averaged 41% gross margin for the iPhone in 2016, almost double the 22% to 25% range analysts are modeling for the Pixel depending on the configuration. So what Pixel will add to Google’s top and bottom lines really is a drop in the bucket compared with the iPhone, a device that brings in 60% of total Apple revenues.
But these disappointing projections should probably not come as a surprise to GOOGL stock owners. Most smartphone users tend to be very loyal to their brands, and the next handsets they buy are largely dictated by past purchases.
Close to 90% of consumers that currently own an iPhone are likely to stick to the Apple ecosystem; ditto for the Android camp. Moreover, asking the average Android smartphone user to upgrade to a Pixel is going to be a tough sell. The Android smartphone average selling price hovers around $250, less than half the price of an entry-level Pixel.
Bottom Line for GOOGL Stock
Perhaps this piece of news will disappoint die-hard Android fans. But that’s only because expectations for the device were out of whack with reality. Google Pixel can still play a crucial role in the company’s ecosystem. It’s easy for investors to snigger when they compare the revenue Morgan Stanley predicts for Pixel in 2017 with iPhone revenue. But Pixel revenue will nevertheless play a much bigger role in Google’s ancillary revenue stream than the company’s [in]famous ”Other Bets.”
If Morgan Stanley’s predictions are within the ballpark, then GOOGL stock will realize revenue of approximately $4 billion from Pixel in 2017. That’s about 5x what the company will get from Other Bets in 2016, including revenue from Fiber, Nest and Verily.
Moreover, GOOGL loses more than $3 billion every year from Other Bets; whereas, Google Pixel looks set to become solidly profitable from the get-go. That’s great for GOOGL stock.
Other than ancillary revenue and profit potential by Pixel, other benefits include better monetization that is likely to accrue from distinctive integration of features such as Daydream and Google Assistant. In the final analysis, Google Pixel looks set to become Google’s most successful hardware innovation, but will have to coexist with, rather than eliminate, the iPhone.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.
