What’s the first thing you think about when it comes to Alphabet Inc (NASDAQ:GOOG, NASDAQ: GOOGL)? There’s a good chance that Search is at the top of your list. After all, its former namesake search site has been driving the cash flows and profits at GOOGL stock for years. Especially since it has data-mined those results to sell plenty of ads and generate significant advertising revenues.
But Google isn’t a one-trick pony.
Like rivals such as Amazon.com Inc. (NASDAQ:AMZN), GOOGL has become one heck of a device and products maker. And while it’s easy to dismiss these gadgets as “hobby business” or non-core operations, the reality is, they are paramount to Google’s underlying mission and business.
In the end, device growth — and what Google does with those devices — is the real driver for GOOGL stock.
Over 157 Products at Google
In total, GOOGL makes over 157 different products for customers. And while the vast bulk of them are Web-based applications — Gmail, Maps, Chrome, etc. — the firm has continued to plow some big-time dollars onto the physical device market.
That may make GOOGL investors a tad bit nervous considering how poorly of an investment Motorola turned out to be for Google. If you remember, GOOGL paid more than $12 billion for the cellphone manufacturer, only to sell it at steep $10 billion loss a few years later. But what Google kept in the sale — some valuable technology patents and applications — is what is going to drive Alphabet’s dominance over the device market.
In recent months, Alphabet has launched new home artificial intelligence equipment, smartphones, virtual reality headsets and home WiFi units. These products join GOOGL’s cadre of Nest WiFi-enabled thermostats and home automation products, Chromebooks and tablets. You name it.
And while many of these items are very impressive in their technology and have caught on with consumers — Nest and its Pixel phones in particular — none of these devices have become huge money makers for Alphabet. Revenues for Google’s physical tools are pretty non-existent and in some products, are actually losses.
So why would Google want even to dabble in device market? It seems that it should just be focusing on ways to continue generating ad sales from is core search operations. But building out ad sales is exactly what GOOGL is doing. To understand why we just need to look at one of its competitors.
Big Data Opportunity for GOOGL Stock
Amazon’s Fire Tablet and new Echo home device aren’t really about making your life easier — it’s about selling you that next movie or book. It’s a way to distribute Amazon’s content and products. In all of this, Amazon is collecting tons of data on your preferences — by what you click and say — to sell you more items down the road.
And that is exactly what GOOGL is doing.
If you’re not searching for something or checking your email, Google has no idea what you’re up to. But slap a home automation device on your wall, smartwatch on your wrist and AI chip in your car, and suddenly Big Brother knows what you’re all about. And in that data collection is where Alphabet is going to thrive.
By doing this GOOGL will now be able to develop a complete profile of its users. Literally everything about you and not just very good educated guesses. Think about how Facebook Inc (NASDAQ: FB) uses all those “likes” and comments to help advertisers screen for just the right person to buy their products or services.
Now imagine what GOOGL can do if it knew you drove to your local 7-11, bought a particular soda and candy bar with your phone, and then played around at your hometown bowling alley. As consumers engage and share information with their Pixel phones, Google Assistants and Chromecasts, that’s just what GOOGL is going to know about you. Not just that you like the Game of Thrones, but also that you eat pizza every time it’s on and that you watch after playing golf on Tuesdays.
That sort of information may seem trivial, but it is gold to advertisers. And they’ll pay a pretty penny to get their hands on that kind of information. Direct targeting is still the best form of advertising out there. Google knows this, and that’s why they are spending so much time on device growth. It’s about building an entire ecosystem of data collection to mine for trends.
GOOGL Stock Is the Tech Stock to Own
In the end, Alphabet is setting itself up to be the absolute king of data collection. Moving beyond the desktop and mobile phone and into our daily lives is the next step in how it will better compete and drive advertising sales. This shift is the next evolution in its business model.
Over the longer haul, data collected from these devices is what’s going to drive revenues and profits at GOOGL stock. It doesn’t matter if takes a loss on a Chromecast today; the info pulled from that device is going to be worth a lot of money down the road.
While it may seem like a waste or hobby, Alphabet’s decision to go device heavy is ultimately going to be its biggest win. Investors just need to hang on until that ride starts to pay off.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.