Apple Inc. (AAPL) has established itself as a leader over the last few years on the back of the iPhone. With huge margins and corresponding revenues, AAPL shares moved up 900% in the last four years, from a low of $77 to the recent $697 high last summer. So, what would it be like if Google Inc. (GOOG) starts manufacturing its own phones just like AAPL? According to widespread reports, Google will start to manufacture its own phones this year, building onto the success of their Nexus line.
Currently, Android owns 69.7% of the smartphone market, while Apple owns 20.9%. Apple enjoys revenue around $150b per year with its market share, whereas Google sees revenues around $50b. In the most recent quarter Google surpassed the $50b in annual revenue mark for the first time. In the fourth quarter it reported $14b in revenues, of which $1.5 billion was from Motorola Mobility. This is the segment of Google that could lead to large revenue increases in the coming years on the heels of a phone launch. In AAPL's most recent earnings report it saw $52b in sales for the quarter, driven by the sale of 47.8m iPhones. The reason for this obvious disparity is based on two factors. Google does not manufacture a phone, and the success of its Android platform benefits companies like Samsung (SSNLF.PK), who manufacture stellar products for said platform. It should also be noted that credit should be given to Apple's ability to lock in a high margin on their products, so even if Google was already a phone manufacturer kicking out the same quantity as Apple, it would not likely be seeing eye to eye with Apple in that respect. But these are two very different companies with different philosophies when it comes to consumer products, and the Android market's dominance would offset the margin disparity.
It can be argued that Samsung has been the big winner with the Android platform, instead of Google. Samsung has surpassed Apple in terms of smartphone sales and profits, accounting for 31.1% of smartphone sales worldwide. Google has to be paying attention to this. Samsung crushed smartphone, android Rivals In Q4 - "Samsung should send Google a thank-you note for developing the Android operating system. The South Korean electronics giant has taken Google's free-to-use, open-source software and built a massive smartphone business around it." Anyone who owns an Android phone knows the frustration of updating the software. Each Android smartphone manufacturer tweaks the software to their liking, which results in delayed system updates. Google's Nexus line, in contrast, sees very timely updates as long as the products are compatible with the newer system builds.
When Google purchased Motorola many believed the sole reason was for patents. Eric Schmidt at the annual meeting last year stated the purchase of the Motorola buyout was, "...for the sum of patents, products, the people, and the innovation." The consensus has been that it was not going to manufacture its own phone. However, that was then and this is now and with the big money being made off of Google's product, with little in revenue to show from it other than ad revenue which is hard to quantify, Google appears to be leaving a lot of revenue on the table. This brings us to the unconfirmed rumor of the Motorola X, a game changer phone that is starting to get a lot of buzz in recent days. The X phone as it is being called, is rumored to be released at this year's Google I/O 2013, in May. The source is from Australian carrier Telstra. According to Telstra sources, Hugh Bradlow, Chief Technology Officer for Telstra, has told senior mobile staff at Telstra the new device is a "real breakthrough, a game changer that will put pressure on Samsung and Apple." Google has been working on this device for a long time. It has software features and capabilities that are not available on a Samsung Galaxy smartphone or Apple iPhone. The software is really powerful and it pulls together Google services like no other manufacturer has done in the past," a reliable source told SmartHouse.
The popularity of Nexus product line continues to grow as was evident when it launched the Nexus 7 line, and now the Nexus4, made by LG (LG). This relationship with other manufacturers is something Google will have to balance as it tries to launch the Motorola Mobility Line. Google seems to be actively rotating the manufacturing services for its Nexus lines through various manufacturers, as seen with HTC (HTCCY.OB), Samsung and LG, an arrangement that is also rumored to be kept in place.
Google currently has a market cap of $262 billion. Apple is sitting at the $421 billion mark. The large growth in the Apple market cap over the last several years has gone off the strength in their smartphone sales. Google already has a wildly profitable advertising business that looks to grow even more with tablets. GOOG is forecast to make $5b this year just from ads on tablets. With a successful move into phone manufacturing, Google could see its revenues soar and with that a corresponding increase in market cap. At $1,200 per share Google would still have a market cap below that of Apple while enjoying the position of monetizing the domination of Android in the smartphone market.
The smartphone market is far from being saturated. The success of Apple over the last few years has spawned the widely used Android system, developed by Google but Google has not benefited from this market share dominance with revenues. Google looks ready to change this with the rumored launch of the X Phone, and investors will have a new reason to buy the stock and revalue it at a much higher price. The X Phone could be the light that leads the way. When compared to the market valuation of Apple and the quick rise of Samsung using Android phones in the last year, the revenue gains for Google on their own manufactured phone could be tremendous. $1,200 per share may seem far off but even that could be a conservative valuation.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GOOG over the next 72 hours.