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Nexus One: Google’s Smart Move

|Includes: AAPL, Alphabet Inc. (GOOG), MSFT
This Tuesday, Google (NASDAQ:GOOG) officially revealed its first smart phone product: Nexus One, manufactured by HTC in Taiwan. Since then, many reviews have been written about the phone. The general perception is that it is a pretty good Android phone, probably one of the best available on the market. According to Google’s press release, the intention of Nexus one is to showcase the applications of Android. But many people also suspect that Google may eventually enter the hardware territory, offering smart phones, netbooks and other products.
No matter what Google is really thinking, Nexus One is another smart strategic move of Google towards the future mobile internet ecosystem.

First, research showed that Android phone users perform 5x more mobile searching than other smart phone users. By showcasing advanced mobile applications, other smart phone manufacturers will have to keep up with the innovation, and eventually lead to more phones with better mobile internet capabilities, and more mobile searching. Mobile advertising is currently the fastest growing segment of Google businesses, expected to grow 100%+ CAGR over the next several years.

Second, Nexus phone will help further expedite Android OS’s market share expansion. When Android OS was initially released, some people even questioned if a google phone would ever be made. In just several months, handset makers raced to get out Android phones, and Android today has an estimated market share of 5% in mobile OS. The momentum is clear, and Nexus one will further help Android gaining popularity.

Last, Nexus One will generate significant revenue and be accretive to the bottom line. It will lower Google’s overall operating margin a little bit, but in the end, it brings additional profit to Google.
Some, particularly Microsoft (NASDAQ:MSFT), question if Google can successfully sell its own phones and license the Android OS to other handset makers at the same time, as the Nexus One phone put Google in a competing position with them. There are two important arguments: Android is free; Not only that, it is also very good. What should they use if not Android, Windows CE? And eventually, if consumers love Android phones and buy many of them, handset makers will have to follow, unless they have better options.
I also believe that Android will present a serious challenge to the popular iPhone from Apple (NASDAQ:AAPL). Admittedly, iPhone may still be the best smart phone for entertainment. But there are quite some people who care less about entertainment features, but like the stable operating system, better integration of emails, contacts, navigation, and other applications offered by Android.
Probably confused by Google’s move, the stock market reacted to Nexus One launch quite negatively, with Google’s stock price dropping three days in a row, from $627 to $592 intraday today, wiping off more than 5% of Google’s market value. Admittedly, Google stock has been moving up almost non-stop for the past several months, driven by the ad market recovery, especially that of online advertising. It may be healthy to have some correction. I would take this opportunity to buy on the weakness, for the recovery theme of online advertising remains intact, and Google’s long term position in mobile advertising grows stronger with Nexus One release.

Disclosure: Long GOOG, AAPL, MSFT