It became crystal clear during yesterday’s Pixel 2 event that Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) is now a hardware company. But Google also made it clear that it’s not prepared to take on Apple Inc. (NASDAQ:AAPL) and other entrenched competitors solely on hardware design.
Instead, Google repeatedly hammered home the point that AI — artificial intelligence — is the special sauce that will make its products like the Pixel 2, Google Clips and Pixel Buds stand out. Whether this gamble pays off has big implications for the company’s hardware ambitions, and for GOOGL stock.
Google Is Going All-in on AI
At yesterday’s big Pixel event, Google CEO Sundar Pichai started off the proceedings by telling the audience we are moving from a mobile-first world to one where AI is more important.
That set the tone for the proceedings. Throughout the demonstrations of key new Google hardware like the Pixel 2, the point was made that only so much can be done to distinguish one product from another by physical design. Instead, Google is leveraging its lead in AI and machine learning to make its products outperform rivals.
For example, the Pixel 2 uses a single camera at a time when dual cameras are expected on a flagship smartphone. Despite that single camera, the new phone can snap a convincing, DSLR-like Portrait Mode photo — a capability that was a key feature of the dual-camera system Apple introduced with the iPhone 7 Plus and carried forward to the iPhone 8 Plus and iPhone X.
Google says it doesn’t need the additional hardware because its AI is so good.
That message was repeated throughout the presentation. AI and machine learning are central to everything from Google Home smart speakers to its translate-in-real-time Pixel Buds wireless headphones.
What Google Hardware Could Mean for GOOGL Stock
In Alphabet Inc’s latest quarterly earnings report, Google revenue was $25.8 billion. The segment of that revenue that is not advertising — including everything from the Pixel Phone and Google Home to Google Play app sales — was $3.1 billion.
Ramping up Google hardware sales means more people running pure Android on a Pixel 2 smartphone. It means more people using Google search on a Google Home smart speaker. This in turn feeds into that advertising revenue, protecting and even growing that critical revenue stream. That in itself is important.
But to see how Google hardware sales could really impact GOOGL stock, look at the potential should the company hit anywhere near the kind of popularity Apple or Amazon.com, Inc. (NASDAQ:AMZN) have with their products.
For example, it’s estimated that the original Pixel sold roughly 1 million units during its first eight months on the market. In its last quarter — a traditionally slow one as consumers hold off on upgrades with a new iPhone just months away — Apple sold 41 million iPhones.
Plug sales of 41 million, with a 50/50 split between the Pixel 2 and Pixel 2 XL (both at their base level prices) and that is $30.7 billion — more than Google’s entire revenue the past quarter.
Despite moves like acquiring 2,000 HTC engineers, Google isn’t relying on design to convince people the Pixel 2 or its other new products are better. The company is betting on its AI lead to make Google hardware shine.
Building an Ecosystem
Throw smart speakers, wireless earbuds and the existing Chromecast streamers into the mix and you have a large pool of products that are popular and also affordable enough for gift-giving. On top of that, Google is adding the Pixelbook for premium laptop fans, and it sells a popular line of mesh Wi-Fi routers.
Go a step further to include Alphabet’s Nest smart home products and suddenly Google is at the center of a hardware and software ecosystem — the kind of “halo effect” that Apple has always enjoyed. Buy a Pixel 2, see everything the Google Assistant can do, and there’s a good chance you’ll start choosing other Google hardware that plays nicely with it, instead of choosing competing products.
A Long Road and No Guarantees
There is a huge difference between selling 1 million Pixels in 8 months and selling 41 million Pixel 2 smartphones in a single quarter. With Amazon firmly in the smart speaker lead and competition from rivals like Apple just about to ramp up, the Google Home speakers also face an uphill battle to the top. Cool as the Pixel Buds and Pixel Clip are, their AI-driven features may not appeal to a mainstream crowd. And there’s no guarantee that AI and machine learning — the key advantage the company is weaving through all its Google hardware efforts — is going to click with consumers.
That being said, Google hardware doesn’t have to be number one to make a meaningful impact.
So what’s the timeframe for the Pixel 2 and the big bet on hardware to begin paying off for GOOGL stock? Google’s CEO told The Verge that Google hardware being important enough to break out numbers separately in financial calls will “definitely happen in the next five years.”
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.