Has Google Found an Ideal Way to Start Nesting in Your Home?

Google is getting its Apple on -- with its $3.2 billion Nest acquisition -- as it takes on Honeywell in the battle to win the "smart house" on its march toward being a major player in the Internet of Things.

Jan 16, 2014 at 2:00PM

If you're following the tech space, you likely know that Google (NASDAQ:GOOGL) announced on Monday that it's acquiring Nest Labs, which makes "smart thermostats" and "smart smoke and carbon monoxide detectors." The $3.2 billion all-cash deal makes it the second-largest acquisition in Google's history, behind only its $12.5 billion acquisition of Motorola. 

Pricey deal? Nope, it's a bargain
There's been the usual buzz from some corners that this is a pricey deal based on Nest's revenue -- or best guesstimates of revenue, as sales figures weren't released.

First, let's put $3.2 billion in context. Google had $54.7 billion in cash on its balance sheet, as of the most recent quarter, and has generated a levered free cash flow of $7.5 billion over the trailing-12-month period. So, we're talking about just 5.9% of its available cash, and at the rate that Google throws off greenbacks, this cash-machine should recoup its investment in less than six months.

Second, this acquisition is more about information and building an ecosystem, than just about generating revenue from pretty gadgets. The aesthetically pleasing home devices provide Google with an ideal entree into consumers' homes, so Google can do what it does best: collect data. The more extensive and better quality data the big G collects on users, the more valuable is its primary product: advertising. Additionally, once Google gets a further foothold in consumers' lives, the switching costs -- the money and hassle involved in moving from one provider or ecosystem to another for any service -- gets upped. 

Google's getting its Apple on as it takes on Honeywell
Nest co-founder and CEO Tony Fadell is a former Apple exec widely considered to be the man behind the iconic iPod design. Not only does Google's buy bring Fadell on board the Android machine, but it also brings several other former Apple execs over to Google.

Not surprisingly, Nest's products -- which are controlled wirelessly via a mobile device, such as a smartphone or tablet -- are easy on the eye with a streamlined design and sport an intuitive user interface. Here's a look at the Nest Learning Thermostat, the company's flagship product introduced in 2011, and the Nest Protect, launched last year:

Nest Products

Source: Amazon.

Sleek, huh? The features of these products apparently resonate with many. The second-generation of the Learning Thermostat is the best-seller on Amazon in the home programmable thermostat category. The brainy device, priced at $249, sports a 4-star (out of 5) rating, based on input from nearly 2,000 customers. Honeywell's (NYSE:HON) high-end offering, which sells for $185, takes the No. 2 spot, in a category in which Honeywell reigns. 

The thermostat's smart sibling, the Nest Protect smoke/carbon monoxide detector, has notched a 3-1/2-star rating on Amazon. The product, priced at $129, comes in both battery-operated and 129-volt wired versions. 

Have you ever batted a smoke detector in an attempt to hit the "off" button when it decided to go to town after getting a whiff of smoke coming from something cooking? The Nest Protection will put an end to that inconvenience, as you can hush it by using a waving motion while standing under the device. It's packed with a host of other nifty features meant to limit inconveniences, as well as improve safety. The Learning Thermostat, likewise, sports many handy mobile device-controlled features to help consumers save money and enhance their comfort. 

Google's entrance into the home automation space has to be viewed as somewhat of a threat to Honeywell, a leader in the broader "building automation" category. While Honeywell is well diversified, as it has four segments, its automation and control segment is its largest segment, accounting for nearly 43% of its revenue in its most recent quarter.

This division is also involved in some heavy-duty commercial and industrial business, and I can't see Google entering the non-consumer space. Nonetheless, home automation is widely viewed as a potentially huge market in the not-too-distant future, so Honeywell can't be thrilled about Google entering the space in which it was an early mover. Cash can certainly be king when it comes to entering -- with the goal of dominating -- a new market. Google's cash hoard makes Honeywell's solid cash position -- $6.15 billion as of the most recent quarter -- look like chump change. 

That said, Google's entrance into the market could, at least initially, benefit Honeywell and the other players, as it's increasing focus on home automation, which could ramp up the adoption rate for smart home products.  

Google's Nest acquisition appears to be its initial step as it takes on Honeywell and others in the battle to win the "smart house." This is one battle on Google's march toward its goal of being a major player in the Internet of Things. Google's well on its way in the other battles -- the battle to win the car and the battle to win the person via its wearable tech (Google Glass) offering.

Foolish final thoughts
Google's Nest acquisition should be good for shareholders, as its attractive, convenience-feature-packed products seem an ideal way for Google to start nesting in consumers' homes. 

Google's master plan appears to be adding one more thing consumers can do, or control, with their mobile device, and then another, and another... until, finally, your mobile device (Android-powered, Google hopes) becomes the remote control to your life. All these diverse things will be seamlessly connected to the Internet and each other, providing you with instant feedback and, hopefully, make your life easier. This, in a nutshell, is what is meant by "The Internet of Things," and it's going to be here sooner than many believe. 

Google's been a great performer, but it's not The Motley Fool's top stock for 2014
The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

 

Fool contributor Beth McKenna has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers