Android, from Alphabet Inc (NASDAQ:GOOGL), is the dominant mobile operating system. It runs on nearly nine of every 10 mobile phones, worldwide. But that’s never really been a primary reason to by GOOGL stock … or at least not directly.
From an investor standpoint, you would still rather buy Apple Inc. (NASDAQ:AAPL) because Apple monetizes iOS the way a butcher monetizes a pig. Google, on the other hand, just gives its OS away to OEMs.
That’s not to say Google doesn’t make any money off Android, though. Simply by offering its search engine and Google Play store through the software, GOOGL rakes in billions of dollars.
What if that changed? Would it mean anything to GOOGL stock holders?
While Google is not yet charging OEMs to use its software, the company has been quietly trying to gain control of its creation. Management is pushing OEMs to deliver security updates on a monthly basis. This is important, as crooks push malware onto older, unpatched phones.
Google’s newest handset, the Pixel, is designed to be as good as an iPhone. Reviews, however, have been mixed. The company is even trying to get back into China through its OEMs (the world’s largest market tossed Google back in 2010 over censorship).
Still, Google has its work cut out for itself. Samsung Electronic (OTCMKTS:SSNLF) dominates the Android market. OEMs and consumers see this fragmentation as an advantage, even though it allows bugs to multiply because they may appear on one device or brand only.
The operating system itself is hopelessly fragmented. Google is only now rolling out its Marshmallow and Nougat versions of Android and still developing the “O” version, while many users have devices that still run the KitKat version. My own Android phone runs on Lollipop, (simply because it lacks the storage to run anything newer).
The way Google eventually gets its arms around all of this may be through Andromeda, an operating system for both Android and its laptop Chromebook devices. Unifying software platforms would give Alphabet Inc the kind of power that Microsoft only dreamed of with its Windows operating system.
Bottom Line on GOOGL Stock
If Alphabet were to start monetizing Android, would investors even notice?
Alphabet continues to grow at 20% per year, powered by advertising on its main Search site and YouTube. The company brings approximately 25 cents of every dollar to the net income line, its balance sheet carries almost no debt, and operating cash flow is ridiculous ($36 billion last year alone, more than twice what it achieved just two years prior). In 2016, Alphabet had revenue in excess of $90 billion.
Over the last year, the price of GOOGL stock is up nearly 17%, and the non-voting GOOG shares are up even more. The company’s market cap of $577 billion trails only that of Apple. Six months ago, they were nearly level, but that was before Apple’s recent run to new highs.
Alphabet Inc CFO Ruth Porat’s program of paring non-performing assets and forcing “other bets” (like the company’s self-driving car unit, now called Waymo) to make it on their own has paid off. Google’s investment balances have been growing steadily, along with its asset base.
What’s most amazing is how Alphabet continues to underperform. Android is not a major profit center, and Google Cloud is often considered third in the market, behind Amazon and Microsoft. Google was late to the voice party with Google Assistant, which allowed Amazon to get the drop on it. Plus, the hardware line is loaded with “me too” products, and GOOGL leads in precisely zero categories.
Still, Porat has performed well in providing discipline to Google executives, but she has not propelled Alphabet to market leadership outside of Search.
If assets such as Android became true profit centers, GOOGL stock would be well on its way to $1,000 per share and becoming the first trillion-dollar company.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in GOOGL, AMZN, MSFT and AAPL.