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Alphabet (GOOG)(NASDAQ:GOOGL) is rapidly increasing the size of its hardware business by adding new devices and increasing the market share of the current hardware products. It is already in a strong second position within the smart speaker and smart home devices segment, behind Amazon (AMZN). Despite the efforts of Apple (AAPL) to increase its market share, Google has been able to retain its hold over smart home devices. Google has also announced doubling production of its current Pixel smartphones due to better demand.
The growth of Google’s hardware business will help the subscription business. The company has already launched Pixel Pass through which customers can pay monthly subscription fees to gain access to all the services of Google and also get a new Pixel device every two years. Growth in the hardware business will help Google limit the massive increase in licensing fees it has seen in the last few years. Google’s potential in hardware business has not been priced. If the management is able to deliver strong hardware growth trajectory over the next few quarters, we should see rapid growth in earnings and valuation multiple for the company.
Google a hardware company
Google receives over 80% of its revenue from its ad business and the hardware business is a minor fraction of the over $250 billion in revenue reported by the company in the last fiscal. However, the company is in a position to deliver rapid growth in sales from this segment as new home devices are launched. According to a recent report by Omdia, Google has overtaken Amazon as the market leader in unit shipments for smart speakers in U.S.
Figure 1: Google overtakes Amazon in quarterly unit shipments in the smart speaker market.
We can see from the above image that the competition is heating up among tech giants to increase their market share in the smart speaker business. The total unit shipments among Apple, Google, and Amazon for the quarter was 10 million, which is equal to 40 million unit shipments on an annualized basis. The global smart speaker shipment in 2020 was estimated to be over 150 million.
Figure 2: Global smart speaker market share and unit shipments.
A report by Strategy Analytics confirms the market position of Google. It gives Google a 20% market share in the smart speaker segment. If we count the market share by subtracting the unit shipment in China which is mostly cornered by Chinese tech giants, the market share of Google would be even higher.
The smart speaker business is the tip of the iceberg in the smart home device segment. This segment has the potential to show a massive increase in new devices over the next few quarters. Amazon has already launched a wide range of new products which includes a robot called Astro priced at $999. Google has the resources and skills to maintain and increase the market share in these new devices.
Licensing fees and Pixel
There has been a rapid increase in licensing fees which Google pays to Apple, Samsung and other OEMs to gain access to their devices and install the app suite built by Google including Google Search, YouTube, Maps, etc. According to an earlier report by Verge, Google could be shelling as much as $40 per device to have …….