Google could more than double revenue within 3 years
When you think of secure investments what do you think? Google? Microsoft? Apple? Why? Because they are proven. They are market leaders and they have dependable earnings. That’s great, but all market leaders face the same problem: How can we grow as a company when we already dominate the market? Especially when the market has reached maturity? Standard practice is for companies to undertake value-added strategies and compete for small percentages of market share; stealing customers from competitors when their back is turned, but this results in a monotonous back and forth for minute revenue increases. How boring.
Google thinks there’s a better way.
In October Google announced a multitude of new products. The one which has people most excited may be the Pixel and Pixel XL smartphones. Why is this so exciting? Yes it’s a new gadget to play with, a new toy for tech companies to dissect and review, and another ally for the android fans in the war against Apple, but ultimately it represents much more. The Pixel represents Google’s assault on the smartphone market; a market worth $420 billion annually. And that’s not all. With Daydream View Google plans to pick up it’s piece of the Virtual Reality market estimated to be worth around $120 billion by 2020, and the Nest product range enters Google into the smart home arena; currently worth just under $50 billion, but, again, estimated to be worth over $150 billion by 2020.
Put it all together and the combined valuation of these markets, by 2020, is estimated to be over $690 billion. Now it’s all well and good entering into billion dollar markets, but actually capturing consumer value and cornering off a sizable piece is what matters. So is Google capable? To answer that question we need to answer a fundamental question: will people buy these new products? There’s a number of factors which contribute to the answer, but I’ll leave the details for another article and keep it simple for now. Let’s focus on Googles smartphone attempt, the Pixel. In terms of pricing and product features it is comparable to models such as the iPhone 7 and Samsung Galaxy s7 and the Google branding can’t hurt. You can find out more from a quick online search, but ultimately yes — Google can compete.
Now that we’ve established that Google can, at the bare minimum, compete in markets valuing up to $690 billion, imagine (rather pessimistically) that Google manages to corner a measly 5% of these markets. That translates to $34.5 billion in additional revenue. For some perspective Google revenues were $90 billion in 2016. That’s a 38% increase in revenues on a PESSIMISTIC outlook. That’s unheard of for a blue chip stock; when was the last time Coca-Cola managed to increase revenues by 38% let alone 3.8%? Now you may be thinking to yourself, “The market price will already take into consideration future cash flows and growth.” And usually I would agree with you, but not this time.
Here’s a timeline of events:
October 1st Google (GOOG) Share Price — $800 USD
October 4th Google releases new product line up
October 5th Google (GOOG) Share Price — $767.57 USD
February 23rd Google (GOOG) Share Price — $829 USD
Does a potential revenue increase upwards of 38% really translate to just a 6.8% increase in share price?
The point I’m trying to make is that Google has the reputation of a blue chip stock which in many aspects, such as financial stability and previous success, it does. However, along with that blue chip reputation come the connotations of maturity and lack of growth which I think are misplaced. Google is in a truly unique position, offering the high growth potential of startups with the financial stability, reputation and resources of an internationally recognised brand.
