Alphabet Inc (NASDAQ:GOOGL) and Amazon.com, Inc. (NASDAQ:AMZN) are a pair of tech giants with very different core businesses, that increasingly find themselves going head-to-head. One of the key areas where their interests are converging is the smart home.
This is a rapidly growing market with the potential to boost hardware revenue and reduce GOOGL stock reliance on ad sales. In Alphabet’s quarterly earnings report, we got a close look at what that battle is costing the company in terms of Nest, its smart home division.
Alphabet has been spending big to get those Nest devices into homes…
Now We Know How Much the Smart Home Battle is Costing
Alphabet reported its Q1 2018 earnings, and because of internal changes within the company, we now have details around the financials of Nest, its smart home division.
As you might recall, Nest had been in the news through much of 2016 and 2017, but not in a good way. The division was embroiled in infighting, lacked new products, and was generally underperforming. Instead of boosting GOOGL stock, as had been hoped when the company was acquired in 2014, it was a drag on the bottom line and a PR mess.
In order to fully realize Nest’s potential to take on Amazon in the rapidly growing smart home market, Alphabet folded the division back into Google starting Q1 2018.
As a result of that decision, Alphabet updated 2017 financials to reflect the Nest move. The division’s revenue and losses move from “Other Bets” to the Google umbrella, which means we can see exactly how Nest has been performing. That shows Nest brought in $726 million in revenue for 2017, but lost $621 million on the year.
Variety reports Google CEO Sandar Pichai wouldn’t give numbers in terms of actual devices sold, but he stated that in 2017 Nest “sold more devices than in the previous two years combined.”
The takeaway? Alphabet has been spending big on Nest to ensure Amazon and its Alexa-powered devices don’t run away with the smart home.
Lucrative Smart Home Market With Big GOOGL Stock Upside Potential
That smart home market is big and it’s growing rapidly. Consumers are snapping up the tech that includes smart speakers, thermostats, security cameras, locks and lights. The market for smart devices and associated services is predicted to grow to as much as $195 billion by 2021.
With Alphabet’s Q1 earnings at $31.1 billion, capturing a big chunk of that $195 billion would have a material impact on its earnings. And that means good news for GOOGL stock — not just because of the additional revenue, but the fact that it would be from a different stream than the ad revenue it has historically relied upon. Diversification is good.
At the same time, getting products like the Nest Cam IQ, Nest Learning Thermostat or Nest Hello smart doorbell into homes contributes to the overall Alphabet ecosystem. Customers who buy Nest smart products are more likely to buy a Google Home speaker and an Android smartphone.
The data from these smart home products also contributes to Google’s growing AI capabilities. All good for Alphabet’s bottom line…
Alphabet and Amazon have been duking it out publicly for more than a year now, with the smart home as ground zero. And now we know how much it’s cost Alphabet to ramp up the battle through Nest: $621 million in 2017. Considering what’s at stake, that seems like a relatively modest investment that could pay off big in the long term.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.