Google (GOOG) will become the first major company to introduce a commercial version of an Augmented Reality (AR) product, with the launch of the Google Glass in the next year. Google Glass has already been given to developers for building apps and has received great reviews. Augmented Reality is the next big wave of growth for the technology industry and big technology giants like Apple (AAPL), Microsoft (MSFT) and Samsung (GM:SSNLF) are already preparing to launch products. However, Google is well ahead of others in developing the first major AR product and it could gain a big first mover advantage over others, if it can deliver a good experience with Glass. In the last 5-10 years, Apple has become the world's most valued company due to its ability to create entire new technology categories through innovative products. The iPad which was first introduced in 2010, created an entire new segment - tablets. Even as Apple faces furious competition in the smartphone segment, its iPad sales are still booming with ~65% growth, during the first quarter of 2013. Apple generates almost $10 billion in iPad revenues each quarter and has got a ~50% market share of the global tablet market. Even if Google manages to generate a fraction of the iPad revenues, then the current stock price will start looking cheap even at a P/E of ~17x.
What is Google Glass
Google Glass is a head mounted display which will function like a smartphone with voice activated commands. The product will allow users to capture photos and videos and browse the Internet.
Google Glass is a wearable computer with a head-mounted display (HMD) that is being developed by Google in the Project Glass research and development project, with the mission of producing a mass-market ubiquitous computer. Google Glass displays information in a smartphone-like hands-free format, that can interact with the Internet via natural language voice commands. While the frames do not currently have lenses fitted to them, Google is considering partnering with sunglass retailers such as Ray-Ban or Warby Parker, and may also open retail stores to allow customers to try on the device. The Explorer Edition cannot be used by people who wear prescription glasses, but Google has confirmed that Glass will eventually work with frames and lenses that match the wearer's prescription; the glasses will be modular and therefore possibly attachable to normal prescription glasses.
How much revenues and profits could Glass Generate?
Google Glass is currently being sold for $1500, though I expect the price will come down substantially for the final commercial product. Google has been known to sell hardware at low prices (Google Nexus), as its main intention is to increase the usage of its software and services. Apple makes ~36% gross margin on its overall business, while it has been estimated that Apple makes 50% gross margin on its flagship iPhone 5. If Google manages to sell 10 million devices annually at ~$500, then the company could make $5 billion in sales and $1.8 billion in gross profits (a 36% gross margin). This will increase Google's current revenues by ~10% and gross profits by ~6%. Not a life changing event, however if Google can sell 50 million devices at ~$300 (not impossible considering that Apple sells ~35 million iPhones in one quarter), then it would make $15 billion in revenues with ~$5.1 billion in gross profits. This would increase Google sales by ~30% and its gross profits by ~17%.
What could go wrong with Google Glass?
Google Glass will mark the first major commercial AR product and it is bound to raise a lot of privacy and regulatory issues. The Government regulations are generally far behind in developing rules and regulations for new technology. Being able to surreptitiously capture pictures and video without informing other people and posting them on the Internet has caused concerns. In the past, technology advances like Google Maps have raised the hackles of different governments for giving geographical information about sensitive sites to potential terrorists. Just like a new medicine, Google Glass may have dangerous side effects which nobody has thought of yet.
Apple, Samsung and Microsoft are also preparing for the AR Wave
Competition is not sitting idle and major technology companies are already planning AR products. New AR products would cannibalize the sales of existing computing devices like tablets and smartphones. Apple and Samsung have a lot to lose if Google Glass becomes successful. Apple and Samsung are set to come out with a "smart watch", while Microsoft plans to further strengthen its living room environment by offering an AR product -IllumiRoom. This product will enhance the TV set by allowing the whole wall to be used as a viewing screen. It will also add realism through 3D effects. It is not known when Apple or Samsung will be launching their smart watches. Apple seems to have made the most progress with the iWatch, though I don't think it will be able to beat the introduction of the Google Glass.
Google faces severe Competition across product and service lines
- Microsoft - Google's biggest competitor in the technology industry is the Seattle behemoth Microsoft. The company fights with MSFT in a number of areas such as search, operating systems, email, office productivity software etc. Google has a stranglehold in the tablet and mobile operating system market with Android. To counter this, MSFT has made the latest Window 8 operating system more mobile and tablet friendly. Microsoft is also making a strong effort to retrieve its "numero uno" position in email by introducing features that Gmail does not have, such as ability to send large files. MSFT has spent billions of dollars to improve Bing's technology and acceptability, but the company has not managed to significantly slow down Google's strong double digit growth.
- Apple - The company has become a bitter rival from a partner in the last few years. Google's Android operating system directly threatens Apple's iPhone smartphone ecosystem, by giving a well supported decent operating system for free to hardware vendors. The erstwhile CEO Steve Jobs spoke of a "thermonuclear war" against Google. Apple recently introduced its own maps application replacing the popular Google Maps. Apple is also trying to reduce Google's search dominance through the Siri application.
- Nokia (NOK) - Nokia has become another strong competitor to Google after the company joined the MSFT camp, ditching its own Symbian operating system. The biggest risk that Nokia faces in regaining its lost market share is from Android mobile phone makers.
- Samsung - While Samsung is a partner to Google currently, we think that Samsung will become a strong competitor soon. The reason is Google's acquisition of mobile hardware vendor Motorola. Google has already become both a partner and a competitor. Samsung being the No.1 mobile phone supplier will have to reduce its Android dependence either by selling more Windows handsets or by making its own O/S (Tizen).
- Facebook (FB) - Facebook is Google's biggest threat in the Internet advertising space. Facebook gets a huge amount of Internet traffic and is desperately trying to monetize this traffic through various means. The company recently introduced an internet search product which competes with Google Search.
- Yahoo (YHOO) - Yahoo is no longer one of Google's major competitors, given its reduced size and ability. Yahoo search and internet properties are not much of a threat to Google. In fact Yahoo recently signed a display advertising agreement with Google to better monetize its existing display properties.
- Blackberry (BBRY)- The iconic Canadian smartphone company has been massacred by Android and Apple in its core smartphone market. The company is trying to make a comeback with a revamped operating system BB 10. We are not sure how much BB 10 and the new smartphones will succeed. We think it will be difficult for BBRY to regain its lost market share without the help of a stronger company. BBRY can pose a big threat to Google if it is bought and leveraged by one of the big technology companies such as Samsung.
Stock Price and Valuation
Google has been consistently making new all time highs as the stock has crossed the ~$850 level. The market is giving Google a higher valuation compared to other large cap technology companies. The reason is that while Google's search revenues continue to grow in double digits, the company is all set to unleash new revenue streams in the form of paid Youtube channels, Google Glass etc. While other mega technology companies such as Intel (INTC), MSFT and Apple are trading at P/E multiple of around 8-12x, Google is trading at a higher multiple of ~17x.
Google faces competition from a number of formidable competitors like Yahoo, Apple, Microsoft, Facebook and Amazon (AMZN). However, Google has managed to grow revenues and profits in high double digits, despite facing severe competition throughout its short history. Though Microsoft and others pour billions of dollars into internet search, Google continues to maintain a monopoly-like position in that product category. Google has invested heavily in futuristic products like Google Glass and "driverless" cars. The company has been criticized for making large risky bets; some of which has proven to be failures (Google Reader, Orkut). Some of them have turned out to be tremendously successful (Youtube, Gmail, and Google Maps). Google Glass is an example of how the company remains at the forefront of consumer technology innovation. While Google Glass may or may not succeed, Google remains a great company and I would look to buy the stock on pullbacks.