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Back in May 2011, I published an article titled "Why Google Will Win The Smartphone Battle," since then Google's (NASDAQ:GOOG) share of the smartphone market has risen from 31.2% (in April 2011) to 50.8% (as of May 2012). Last Wednesday, at Google's I/O conference, a new tablet was anounced called the Nexus 7. The Nexus 7 will sell for $199 (8GB model), run Android 4.1, and have a 7" display. I believe this tablet will be able to garner significant marketshare from rival Apple (NASDAQ:AAPL), and establish Google as a dominant player within the tablet realm. Let me explain.

There have been two major drivers behind the success of Android within the smartphone market. First off is the opensource formatting of the software that has enabled numerous electronic makers to put Android devices on the market. Second is the market for lower end smartphones, in which Google has created its own niche. The Nexus 7 is currently priced $300 cheaper than the newest iPad (which retails for $499+). For this reason I do not see the two as completion, but rather product diversification within an expanding sector.

In Q1 2012 (fiscal Q2), Apple sold 11.8 million iPads, a 151% increase year over year. Gartner reported about 60 million total tablet sales in 2011, and sees that number jumping 98% to 118.9 million units. So who is going to step in and fill the gap for these additional 58.9 million units? Google. In 2011, almost 40 million iOS tablets were sold, compared with just 17.3 million Android devices. Although Google is off to a slow start Gartner has Android tablet sales drawing almost even with Apple's by 2016. Total tablet sales for 2016 are estimated to be about 369 million, with 169.6 million coming from Apple and 137.7 million from Google. The opensource format in which Android is distributed gives Google a huge edge in the long term, and the estimates would agree.

As more developers hop into the tablet market because of increasing consumer demand, not only the total number of Andriod products will increase, but the amount of apps will as well. The iOS software used to run the iPad isn't on any other device, thus the demand for apps in Apple's App Store is directly tied to demand for the iPad. But this isn't the case for the Nexus 7, and the Android Marketplace. The Nexus 7 will by no means be the only Android tablet using apps, Google has a an army of manufacturers spitting out tablets that are simultaneously distributing Android to the masses. This diversification across numerous different tablets will give Google a much bigger window for growth.

Although thus far no tablet has really been able to compete quality wise with the iPad, that doesn't matter. The iPad is by no means a tablet for all, it sells at a very premium price point. Up until now the tablet market has been mainly for high end consumers, that's why we hadn't seen any major changes in PC sales. But that is quickly changing, last Black Friday PC sales dropped 8% year over year. This was coincidentally timed with the iPad's best selling quarter ever, in which year over year growth was a steller 111%. This is the start of a much larger trend, consumers are ditching PC's for tablets.

As tablets quickly become powerful enough to replace PCs, lower end consumers will need an alternative to the iPad. That is where Android comes in. In exactly the same fashion that Google grabbed the majority of the smartphone market, it will grab the majority of the tablet market.

Conclusion

The expanding tablet market has provided a huge opportunity for many new players to establish themselves. Google has positioned itself excellently in this segment by keeping Android in the opensource format, and furthering its prevalence by the launch of the Nexus 7. As Google finds its niche within the tablet market just as it did in the smart phone market, it will eventually be the majority operating system.

Valuation

Google shares currently trade at just 11.5x 2013 earnings. With revenue growing at a solid 20% pace (and expected to average over 17% growth for the next five years), the shares are cheap. Google has not only furthered its presence in the smartphone market in the past year (with market share rising 62.8%) but has now made a big leap into the tablet field. If Android becomes as successful among tablets as it is with phones, Google's shares will become even more undervalued as a result.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Why Google Will Win The Tablet Battle