Google Targets Smartphone Market

Google parent company Alphabet is buying staff and intellectual property from HTC - as sign the company is targeting the smartphone market more aggressively

Ali Mogharabi 22 September, 2017 | 9:02AM
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Google parent company Alphabet

Google parent company Alphabet (GOOGL) has announced it is purchasing HTC’s staff who work on its Pixel-only team, and non-exclusive rights to some of HTC’s intellectual property for approximately $1.1 billion in cash.

In Morningstar analysts’ view, this deal represents Google’s further emphasis on its end-to-end consumer hardware development strategy as price is no longer a differentiator for Google. Morningstar equity analysts think the firm is targeting the smartphone and overall consumer hardware market more aggressively to maintain and grow its dominance in the online search market.

We believe this could further strengthen Alphabet’s network effect and intangible assets moats – sources of potential lead over competitors – as Pixel and other hardware can bring in more users, increasing user count and user engagement, from which more data will be compiled and utilised to drive more online ad revenue growth.

It remains to be seen whether such a tactic will bear fruit, as Google is in fierce competition with Apple and Samsung within the smartphone market. We still have a wide-moat rating and a $910 fair value estimate for this three-star name. 

In our view, Google’s main intention is to have more control over and to speed up its Pixel smartphone integration with various innovations that the company adds to its Android operating system, Google Assistant, and apps utilizing the two. This can strengthen the firm’s overall ecosystem as it creates some commonality, mainly Google Assistant, among nearly all its hardware offerings. The firm is scheduled to introduce its latest Pixel smartphone next month, and this agreement displays Google’s long-term commitment to such as strategy. 

We do not expect this acquisition to strain Google’s relationship with some of the world’s leading Android-based smartphone vendors. In our view, the vendors would be hesitant to change their smartphone’s Android operating system that has created some stickiness for the smartphone users. According to IDC, vendors such as Samsung, Huawei, and LG have worldwide smartphone market shares of 20%, 8%, and 3%, respectively, which we don’t think they want to risk losing. Those vendors are also aware that Pixel and its mere 1% market share do not pose a threat, for now. 

According to both companies, this deal is likely to close in early 2018. 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Alphabet Inc Class A154.96 USD-0.67Rating

About Author

Ali Mogharabi  is an equity analyst for Morningstar

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