Apple & Google: 2 'Must Haves' For Tech Investors
Christopher is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The world of technology is evolving towards cloud based systems which allow users to do more than store and send files, search the Internet or shop without going to a store. The next step is more control over more aspects of consumer lives through smartphones and tablet computers. Soon the TV, radio, music, communications and probably the ice maker in the fridge will be under the control of a hand held operating system. An article published by the Wall Street Journal shows that Google (NASDAQ: GOOG) – not wanting to miss the bulk of these new uses of cloud and wireless computing – is ready to move into hardware design, production and sale to take a slice away from the Apple (NASDAQ: AAPL) market or even jump ahead of Apple in some technology applications.
The WSJ article states Google plans to introduce a wireless home entertainment system later in 2012. The system will be Google designed and controlled through a smartphone or tablet computer running Google's Android operating system or a form of the OS. The information about Google moving into the technology hardware business came just days after the company received U.S. and European Union approval for the proposed purchase of Motorola Mobility (NYSE: MMI). It appears Google believes that producing hardware is an important component for the long term growth of the company. One point made in the above mentioned article is the relatively small size of the global market for home audio hardware, just $8 billion for the entire market. In comparison, Google reported 2011 revenue of $37.9 billion and Apple has sales of $108 billion.
Apple has shown that the right products can transform a sector of technology devices. Examples include the iPod, then the iPhone and currently the iPad. A Google home wireless entertainment system would be targeted to transform how consumers used their home entertainment appliances – resulting in a much larger than $8 billion market. The Google Android operating system is a strong competitor to Apple in the smartphone space, but Android on tablet computers have not yet produced sales figures on a level with the iPad. A home entertainment system with hardware from Google and controlled by a form of Android could be a transforming step in consumer technology.
The folks at Google may see what Apple has accomplished over the last several years and have decided that to take their business to the next level, hardware sales must be part of the equation. Since the end of 2008, the Google annual revenue has increased by 74%, from $21.8 billion to 2011's $37.9 billion. Net income grew to $9.7 billion from $4.2 billion, a 124% increase. However in the same period, Apple increased sales by 190% and profits grew by 325%. The result is that Apple was 1.5 times the size of Google in 2008 and now is nearly three times as big as the Internet giant.
Side note: Apple and Google can do the things they do because these two companies are hugely profitable. Apple brings almost 25% of rapidly growing sales to the bottom line. Google also reports a 25% profit margin. In contrast, Amazon (NASDAQ: AMZN) earned $631 million on sales of $48 billion in 2011 – a profit margin of just 1.3%.
So can Google produce electronic equipment which consumers will see as a home necessity? That is where the company needs go with its move into selling first its branded home wireless entertainment systems and eventually follow-on products which enhance and expand the customer experience. If Google can get enough consumers to go for a Google sold, cloud based, wireless entertainment system, the results will be good for Google, but also could put a serious dent in Apple's rate of growth. The Android operating system is already used by every manufacturer of smartphones and tablet computers not named Apple. A Google in-home system would provide additional sales channels for companies like Samsung and Toshiba, both of which are players in products such as televisions as well as computers.
The challenge is that no other company as been able to come close to putting out products which provide a certain user experience and generating customer loyalty like Apple. Developing and selling an integrated home entertainment system – if it provides that outstanding user experience – may be a way for Google to jump up to a competitive level with Apple in selling hardware and also the sales of soft goods – digital music and video – to use on the system.
For investors, shares of Apple and Google should be in every portfolio which has a significant technology allocation. Currently growth at Apple shows no signs of slowing, the only thing holding back share values is the market trying to get its head around a company with a $500 billion market cap and growing at greater than 50% per year. Google is a stock which does not get much respect for a company which generates that much cash, although it trades at a higher P/E than Apple. It will be interesting to see how the market and investors react once Google is finally selling its own products such as phone, tablets and this soon to be announced home entertainment system.
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