For the most part, the market hasn’t paid too much attention to the decision by Alphabet Inc (NASDAQ:GOOGL) to double down on the hardware market. Alphabet has agreed to pay $1.1 billion for intellectual property and employees from Taiwanese smartphone manufacturer HTC, which brings its Pixel production in-house. And it’s hard to see that move as anything but bearish for GOOGL stock.
First, Alphabet is doubling down on a hardware business in which it hasn’t had much success. To be fair, the company’s acquisition of Motorola back in 2011 wasn’t as big as a bust as some GOOGL bears have argued.
Alphabet did acquire valuable patents and real estate before dumping the business to Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) at a substantial loss. Still, Google is nothing but a bit player in the smartphone space — a space that looks increasingly competitive and low-margin.
Secondly, Alphabet’s continuing efforts to diversify away from advertising show that the company itself sees growth in the space decelerating, if not coming to an outright end. If those efforts don’t work, GOOGL stock could have
If those efforts don’t work, GOOGL stock could have downside risk. And even with the HTC deal, there’s little sign that Alphabet is having success in its efforts to become more than just a digital advertising provider.
Is Hardware Helpful To Google Stock?
The most obvious question about Alphabet’s re-emphasis on hardware is: why? It’s not a particularly attractive business. The lid that was kept on Apple Inc. (NASDAQ:AAPL) stock for most of 2016 was based on fears of Chinese competition and so-called “commoditization” of the smartphone.
As technology increases, the feature differentiation between an iPhone and a low-cost overseas competitor will diminish. That – in turn – would lower prices and remove margins.
The argument is that in smartphones, Chinese manufacturers will do the same thing that Lenovo did to US makers like HP Inc (NYSE:HPQ) and Dell Inc. (NASDAQ:DELL). Apple stock has shrugged off those concerns – for now. But Google isn’t Apple.
In fact, Google looks rather poorly-positioned in the space. Is it really going to compete with Apple on the high end? The coming Pixel 2, manufactured by LG, seems a step in that direction, with the base and XL models having $649 and $849 price tags, respectively.
But the idea that Google can compete with not only Apple but Samsung seems like a stretch. Google already has tried – with limited success. And no less a company than Amazon.com, Inc. (NASDAQ:AMZN) failed spectacularly in the space, with its Fire Phone.
There might be enough margin around the edges to make Google’s second, lower-cost, venture into smartphones worthwhile. But it’s highly unlikely that the Pixel can penetrate the high-end space.
Both Apple and Samsung are entrenched and respected, and Nokia Oyj (ADR) (NYSE:NOK) is aiming for the same customer base with its Nokia 8. The Pixel just doesn’t have enough room on the high end, and it won’t be cheap enough on the low end. That seems a notable headwind to success.
Why Alphabet Is Chasing Hardware
More broadly, the Pixel is a piece of a larger effort by Alphabet to expand beyond its legacy advertising business. But if it fails, the narrative around GOOGL stock has to start incorporating the company’s overall lack of success on that front. Google Fiber is being pulled back. Google’s cloud business is a distant third, at best, to Amazon and Microsoft Corporation (NASDAQ:MSFT).
The Chromebook has a nice niche, but isn’t a real threat to higher-end Apple or Microsoft Surface products. Google Home is a distant second to Amazon’s Echo on a unit basis, by most estimates, though recent leaks suggest a Google Home Mini is on the way. Self-driving unit Waymo has generated a lot of press, but likely no revenue, let alone profit.
Bottom Line on GOOGL Stock
Alphabet simply isn’t winning beyond advertising. But the amount of effort Alphabet is putting in shows that the company itself knows it needs to start doing so.
The deal with HTC isn’t going to fix that problem. If anything, it highlights it. And that’s an issue for GOOGL stock.
As of this writing, Vince Martin has no positions in any securities mentioned.
