Google (GOOG) recently announced its newest entry into the tablet wars, the Nexus 7. It is the first tablet to use Chrome as its default browser, and the tablet will come with the full range of Google products, including maps, YouTube, and GooglePlay. The Nexus 7 is a 7-inch tablet, and it looks a lot more like a Kindle Fire (AMZN) than an iPad (AAPL). We like that Google has finally decided to enter the battle, but we don't think the Nexus will be much competition for the iPad or even the new Surface (MSFT). For the time being, we suspect the Samsung Galaxy tablet will remain the main Android device competing in the high-end space.
At 7 inches, the Nexus looks an awful lot like the Kindle Fire. It should be easily portable and more pocket-sized than the iPad, and it will likely provide a lot of competition in the e-reader space. We think the Nexus is a direct attack on Amazon and Barnes & Noble (BKS). Its Android interface could make it more popular than the Kindle Fire or the Nook in a relatively short amount of time. Amazon built its operating system on Android, but it has notable differences in appearance. At $199, the Nexus will likely be an attractive alternative. The Nexus will also have access to the enormous range of Android apps, which is second only to iTunes.
Oddly, the surface will only have access to wireless and not cellular networks. This means carriers like Verizon (VZ), AT&T (T) and Sprint (S) will not sell the devices and subsequent lucrative data packages. We find this decision a bit perplexing since the Nexus is a portable device, but we also understand the company doesn't want to ruffle the feathers of OEMs (original equipment makers).
However, we do not think the Nexus tablet will be much competition for either the iPad or the Surface. The Surface hasn't yet been released, but we think its superior computing power will target a different demographic. On the other hand, we think the Apple ecosystem is sticky enough to fight off competition from Google. The resiliency of the iPhone against cheaper Android competition makes us believe that the iPad will easily maintain its growth trajectory in spite of competition from the Nexus (and the Surface). Apple might even take aim at the low-end of the tablet market, releasing an iPad the size of the Fire and the Nexus, but that remains pure speculation. We think Google will wait to see how the Nexus 7 does in the marketplace before launching a comparable high-end tablet to the iPad and the Surface.
At current levels, we think shares of Google are undervalued. It seems as though many investors are focusing on the company's competition in the mobile computing space, but are ignoring the firm's dominant search and advertising businesses. Google scores a 6 on our Valuentum Buying Index, suggesting we're becoming constructive on the firm's prospects. However, we aren't ready to pull the trigger just yet (we'd like to see a 9 or 10 on our Valuentum Buying Index before doing so).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Some of the firms mentioned in this article may be included in our actively-managed portfolios.