It's Official: Google Acquires Waze

| About: Alphabet Inc. (GOOG)

A much rumored deal finally has become reality on Tuesday. Google (NASDAQ:GOOG) announced the acquisition of Israel based Waze. Although an official purchase price has not been announced, local press anticipates that the tech giant has spend between a billion and $1.3 billion for the producer of the GPS mobile navigation application.

The Deal

On its blog, Google confirmed the rumors about the acquisition of Waze. While Google already owns its own maps platform, which is leading in the industry, it is willing to fortify its position by acquiring this crowd-sourced app. Waze's technology is more real time based and adds social dimensions to Google's rather static current map offerings.

Waze had some 36 million users at the end of 2012 and an active online community of 65,000 users which make frequent updates to its maps, speed limits and roadworks. Waze claims that it currently has 47 million users, and that an incredible 9 out of 10 drivers in Israel use its services.

Its software is much more user friendly and could boost engagement and integration with social features, an area in which Google is still lacking. Backed by Google's database and marketing power, Waze could eventually improve or replace Google maps.


It is interesting that Google is willing to spend to fortify its position in an area in which it is already leading. Google recognizes the importance of maps in terms of user engagement and integration with other services and is happy to pay up to keep Apple's (NASDAQ:AAPL) and Facebook's (NASDAQ:FB) competition away.

Previous rumors indicated that its main competitors have shown an interest in Waze, which employs just about a 100 workers, as well. Apple was rumored to offer $500 million for the business at the start of the year, but talks have ended. Facebook has become interested in a later stage, but talks broke down despite a rumored $1 billion price tag as Facebook wanted to move the R&D team from Israel to California. Supposedly Google has agreed to leave this team based in Israel.

It seems that Google was willing to pay even more, providing exit shareholders of Waze with amazing returns. As recent as 2011, Waze managed to raise $30 million in financing from financiers including Kleiner Perkins Caufield & Byers, among others. Other prominent investors in the company are Microsoft (NASDAQ:MSFT) and Qualcomm Ventures.

Strong Track Record

Google has a strong track record with regards to acquisitions. Its 2005 acquisition of Android has been of incredible importance as it is the world's dominant operating system for mobile phones and is rapidly boosting its presence in the increasingly important tablet market. Other great deals include the mere $1.65 billion deal to acquire Youtube, followed by the purchase of DoubleClick.

Google ended its recent quarter with $50.1 billion in cash, equivalents and short-term investments. The company operates with merely $5.1 billion in total debt, for a solid net cash position of around $45 billion. Even if Google has spend over a billion for Waze, it is just a drop in the bucket.

The acquisition of Motorola Mobility has largely failed, but have actually brought a lot of benefits to Google in terms of deferred tax credits.

All these deal seemed really expensive at the time of closing, but some of these have paid off handsomely, being part of the core of this multi-billion company.

Investment Thesis

Waze will not make a dent to Google's operations this year, and most likely not even next year. Yet the continued innovation and long term strategy of the firm has allowed Google to continuously grow its operations. The unknown price tag, rumored around a billion seems like a lot of money. Yet Waze has the potential to become part of the core of Google's activities in the medium term, generating billions in annual revenues.

For now, shares of Google trade with year to date returns of around 25% at $880 per share. This values the firm at $290 billion, or its operating assets at $245 billion, excluding the net cash position of the firm. Based on last year's results, this values the company at almost 5 times annual revenues and 22-23 times annual earnings. Google did manage to grow its revenues by 32.4% last year, while earnings rose by merely 10.3% as the company continues to invest into the future.

The latest deal most likely represents an excellent exit opportunity for Waze's founders and early stage investors. Still Google might be the winner in the end. Waze has the potential to become a crucial part of Google's multi-billion dollar generating empire in the medium term. If it becomes a failure, it is just another drop in the bucket, with a price tag of just around a month's worth of earnings.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.