Think Twice Before Selling Google Stock On Nexus Concerns

| About: Alphabet, Inc. (GOOGL)
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Response to an alarming article by Anton Wahlman addressing a few issues.

Android market share is much more important than Nexus sales and looks fine, according to IDC stats.

The Nexus 5 may not be available at Wahlman's location, but that doesn't prove the company isn't capable of selling a phone.

The Nexus 5 probably sold really well, as asserted by Google, but shareholders shouldn't be too concerned whether Google sells any handheld devices.

The Nexus phones are intended to function as a supporting device for the adoption of Android.

Reading Anton Wahlman's article on Google (NASDAQ:GOOG) (NASDAQ:GOOGL), I just had to respond. Well intended as it may be, I think it misinforms readers. I'll systematically go over the paragraphs I take issue with:

Google's smartphone product strategy and sales are going from bad to worse, from one month to the next. As of this writing - December 20 - there is not a single Google smartphone available for purchase on Google's own site for smartphone sales.

You read that right. Not a single one. They are all listed as "out of stock" and have been so, in some cases, for over a month.

It became a critical problem already two months ago, but one would have thought that the problem would have been cured by now. For the dominant smartphone operating system, Android, with 80% worldwide market share, it's highly curious to say the least, that Google can't even make itself sell a single phone directly to the consumer anymore.

I followed the link provided by Anton and the Nexus 5 was available to me. Most likely it's because I'm in Europe and Anton is in the U.S., but Google is a global company, the majority of its revenue is from overseas and it's clearly still selling phones:

Source: screen shot by author, edited to point out it's in stock at my location

I also think using the phrase "critical problem" is exaggerating the issue when Google is either taking razor-thin margins on Nexus devices or selling them at a loss.

Anton then goes on to show that he knows who is buying the Nexus devices. I think he isn't far off in this instance:

That said, for Android's biggest fans, developers and other people who really cared about what they bought, there was a different path: Buying "clean" Android devices directly from Google ...

But then he continues with a curious paragraph:

Here is how the conversation must have gone, inside Google:

Question: "Guess what, all of the clean Android Nexus and Google Play Editions are so popular that they are chronically sold out when we sell them directly to our biggest enthusiasts and developers. What should we do about it?"

Answer: "Well, obviously since there is too much demand for our clean Android phones, we must kill those products."

Normally, if you have a product that is sold out and people are - at least virtually - standing in line to buy, you produce more of it (or them). Apparently, not so with Google and its partners for "clean Android" phones.

First of all, the Nexus is probably something of a loss leader product, so holding it up to traditional manufacturing rules is not entirely fair.

The Nexus 6 should also have been widely available by now and went up for pre-order at several places. With "Google's biggest enthusiast and developers" being the target audience for the Nexus devices, do you really need to continue to offer the old model when a new one is on the cusp of arriving?

Some people may even feel cheated buying the Nexus 5 and discovering the Nexus 6 is released soon after.

Finally, the limited availability of the Nexus 6 may be just be part of a good old marketing ploy of making a product more desirable by limiting supply.

Anton addresses the problem with the Nexus Phone in more detail:

The problem with the Nexus phone right now is that Google was offering the Nexus 5, built by LG, for $349 and up, but it is effectively discontinuing it in favor of the Nexus 6, made by Motorola, for $649 and up.

As I've already said, I'm not sure discontinuing an old device is so terrible when its target market is developers and fans.

Google did change directions with the $649 pricepoint. It is now being supported by the big carriers, wheres previously devices were not.

You can get it with a two-year contract for $199, which is less than previous devices. On the whole it's more expensive, but people do not have to put as much money down upfront.

Hiroshi Lockheimer, vice president of engineering for Android, said he expects the more traditional pricing model will spur sales.

He also compares the phone to the iPhone 6 Plus, which starts at $749 unlocked or $299 with a two-year contract, and the Galaxy Note 4, which costs $700 unlocked or $300 with a contract. There is something to be said for comparing the phone to contemporary competitors instead of a predecessor.

But there is more:

The problem isn't even the steep price increase - almost 100% - but that most people just don't want to hold a 6-inch phone.

It's as if Google took the walking joke of a small portion of people actually liking these 6-inch "phablets" and thought that it was suddenly mainstream. It is not.

It's a cliché but it was Steve Jobs who famously said:

A lot of times, people don't know what they want until you show it to them.

So whether people will want a 6" Phone remains to be seen. In addition the Nexus being aimed at fans and developers their tastes may differ significantly from that of the mainstream. The Nexus isn't intended to be a mainstream device. In any case, they got used to the screen size at tech blog the Verge:

Living with a giant-screened phablet takes some getting used to, but it's nearly impossible to go back once you do. So many of the foibles of smartphones become lessened or eliminated simply because there's simultaneously more space on the screen and many of those things are bigger and easier to tap. It's easier to show stuff on your phone to other people, it's easier to turn it into a reading and movie-watching gadget, and it's way easier to type on.

Anton then compares Google's efforts to that of Apple:

Just look at Apple (NASDAQ:AAPL), which knows what it's doing. It sells most phones in the 4.7-inch size, far fewer at 5.5 inches, and still offers two 4.0-inch phones. It was not foolish enough to place an exclusive bet on the 5.5-inch phone, let alone a 6.0-inch phone.

This comparison isn't as predictive of future success as you may think. Apple is in the business of selling devices and pulling users into its ecosystem. It's operating with a different angle and its serving a much larger audience than Google is with its Nexus device. The iPhone, as upmarket as it is, is a much more mainstream device.

With the iPhone 6 the company offered a larger size for the first time. You could argue just as well, it isn't entirely sure people want a 5.5-inch Phone or are aware there is a % of users in the high-end market who prefer large screen sizes.

As a shareholder, one really wonders why and because of whom the wheels came off Google's Android smartphone strategy. One inflection point was when Hugo Barra left as head of the Nexus hardware program in August 2013.

The above suggests, based on shareholders being mostly interested in present and future cash flows, Google is losing a lot of money by discontinuing the Nexus 5 or that something is going wrong with its Android strategy. I'll get to Android in a second, but let's keep things in perspective.

If Google sold 10 million Nexus 5 units it would have been a tremendous success. Google keeps the numbers secret and I haven't seen any estimate this high from experts.

The figure is probably much lower, but let's assume for a minute they did sell 10 million at $349. That amounts to revenue of $3.49 billion over approximately five quarters. LG Electronics (OTC:LGEIY) manufactures the devices, so a major part of the revenue should be attributed to them. Over the same period Google does something like $87 billion in sales. Even when taking a hugely optimistic sales number the numbers show the sales are pretty much inconsequential to Google's total business.

The author goes on to tell us why Google is vastly underperforming Apple and other companies:

Something is really not well at Google. How is it possible to trip up the amazing position Google had in the smartphone world one year ago into the abyss where it's not even capable of selling a single phone directly to the consumer today? If you want to know why Google's stock is down in 2014, vastly underperforming Apple and other companies, look no further than this fiasco.

When I examine these IDC figures, Google still has an amazing position within the smartphone world:

IDC: Smartphone OS Market Share 2013, 2012, and 2011 Chart

Source: IDC

From the graph above, Android appears to be doing fantastic. With over a billion activated Android devices, the total number of Nexus devices is a drop in a bucket. With all Android devices hooked up to the Google Play Store it's much more important to sell Android phones than to sell Nexus phones.

Furthermore, Google's intention with the Nexus device should not be misunderstood. It's a device meant to showcase Android at its best. It's intended to support Android, not drive profit directly. I think Google may not even be selling the devices at a profit, possibly at a loss. A strategy that could change with the Nexus 6.

Importantly, whether Google sells a lot of Nexus 5 devices and continues or discontinues them in the 1st quarter of 2015 doesn't make much of a difference to shareholders.

Google probably did quite well with its Nexus 5 and it is still available in the Netherlands. It's hard to believe smartphones being available in the Google store are causing Google to lag Apple and the S&P 500.

It's a little outside of the scope of this article, but reviewing Apple articles on Seeking Alpha will give you an idea of the actions Apple took, if you aren't already familiar, that may have caused the stock to have a great year. Google is lagging the S&P 500 by a much smaller margin; in any case the underperformance is well within standard variance.

The world has over one billion Android smartphone users, and it's time for an intervention. Unless Google is on the cusp of springing some amazing new strategy and product portfolio on us, I fear for the platform's future.

With Google near a 90% marketshare in the worldwide smartphone OS market Anton's fear for the platform is premature. Shareholders may also want to see how the new OS, featured on the Nexus 6, Lollipop performs.

Anton ends his article on the following note:

It doesn't get much worse than this. Not only from a shareholder's perspective, but from an Android user's perspective. It's like watching a car wreck live.

Small wonder the stock is down.

Wanted: New management.

I'd like to reiterate that Android is doing fine, Nexus sales are inconsequential to earnings and the stock is almost surely down because of other reasons, or it may just have taken a breather after an excellent 2013. I see no reason to panic and adjust a Google position based on the performance or availability of the Nexus 5 or other issues raised by Anton.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.