Last month, I wrote that rumors of the demise of Google's (GOOG) Nexus 7 tablet were vastly premature. At the time, various analysts and tech followers were arguing that the Nexus 7 was about to be superseded by various competitors; Amazon.com's (AMZN) new Kindle Fire HD, an iPad Mini from Apple (AAPL), or even a new "Nexus 10" from Google. More recently, there have been rampant rumors that Google will release a $99 Nexus tablet this quarter. However, I believe that my original thesis still holds: the Nexus 7 still has a relatively long shelf life ahead of it.
Of course, Amazon's Kindle Fire HD is a worthy competitor, and will appeal to consumers who are primarily looking for a tablet that is optimized for digital media consumption. Apple recently sent out invitations for a press event on October 23, and is expected to unveil the long-rumored "iPad Mini", which may go on sale around Nov. 2.
Nexus 7: Clear Advantages
Given the iPad's continuing popularity, a lower-priced model is sure to make inroads amongst price-sensitive consumers who are not tied to a particular ecosystem. However, for the hundreds of millions of Android users worldwide, the Nexus 7 still offers clear advantages. With its low price point and high specifications, it is a better value proposition than competing Android tablets. It is thus not at all surprising that the Nexus 7 has quickly become the best selling tablet other than the iPad in most of its markets. While Google did not reveal sales numbers this week, analysts are guessing that Google sold roughly 1 million for Q3 based on increases in Google's "other revenue" line.
If Google releases a second tablet for the holidays, whether it is a slightly more expensive 10" model, or a budget $99 model, this could dent Nexus 7 sales going forward. However, I would be surprised if Google releases either rumored tablet this year. Given that the Nexus 7 has been selling fairly well, the risk of cannibalizing Nexus 7 sales would outweigh the benefit of incremental tablet sales for Google. A 10" tablet would face much stronger competition from the iPad, as well as from the upcoming Microsoft (MSFT) Surface and Kindle Fire HD 8.9 (both of which would likely beat the Nexus 10 to market).
The biggest drawback of a 10" tablet is that Google lags well behind Apple in building a strong ecosystem of tablet-optimized apps. An app built for a 4-5" phone screen might look OK on a 7" tablet, but not on a 10" tablet. Google is currently making a push to increase the number of tablet-optimized apps; if that effort is successful, it might make sense to release a 10" tablet at some point next year.
As for building a $99 tablet, Google would either have to take significant up-front losses on each unit sold, or accept inferior build quality, or both. Given that the Nexus 7 will sell a lot of units during the busy holiday season at break-even (or a small profit), I can't see any compelling reason for Google to sacrifice profitability in pursuit of additional market share. On the other hand, Google would risk damaging its brand equity by releasing a cheap (i.e. low-quality) tablet. I think it's more likely that Google would drop the price of the 8GB Nexus 7 to $149 at some point in the future, as the product ages.
By contrast, recent rumors that the Nexus 7 16GB version will be replaced with a 32GB model seem much more plausible. Given the lack of a memory expansion slot, some consumers may be turned off by the Nexus 7's relative lack of storage capacity. According to a recent BOM analysis for the new Kindle Fire HD, the cost of 32GB of flash memory is approximately $17 (versus $9 for 16GB). Considering the fact that Google charges $50 for the memory upgrade ($249 vs. $199), the additional sales that a 32GB option could generate would likely justify the marginal additional cost. With the recent launch of the Nexus 7 in numerous Asian markets, and the expected upgrade of the $249 version to 32GB of storage, I think Google could sell as many as 5 million Nexus 7 tablets during the Q4 holiday season.
Impact On Suppliers
Ultimately, the Nexus 7 is a tiny part of Google's business; the bigger impact will be on suppliers. I continue to believe that Nvidia (NVDA) is very well positioned on this front, with its design win in the Nexus 7 (as well as placement in other Android and Windows RT devices). Nvidia is in the midst of trying to increase sales of its Tegra line of mobile processors to a level that can support its ongoing R&D costs.
Last September, Nvidia CEO Jen-Hsun Huang predicted that Tegra revenues could reach $1 billion in FY13, which he said would be sufficient to make the Tegra business profitable, after losses estimated at $150-$200 million in FY12. Nvidia subsequently lowered its FY13 Tegra revenue guidance to $540 million. Assuming 8-10 million processors shipped for the Nexus 7 in FY13 (which ends in January), Nvidia could see up to $200 million in revenue from this one design win. This would put the company well on its way to beating its downwardly revised guidance. This, in turn, will help Nvidia leverage R&D costs and return to year over year profit growth in 2HFY13. I therefore rate Nvidia a buy at its current price around $12 ($7 excluding cash). I would also consider buying shares of Google once the stock stabilizes, but I would recommend steering clear of it for the next couple of weeks.
Additional disclosure: I am also short AMZN.
