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Alphabet Steps Up Its Hardware Game Again

By Daniel Sparks - Oct 16, 2019 at 11:03AM

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Hardware is a small but important catalyst for the online search giant.

For the most part, Alphabet's ( GOOGL -0.68% ) ( GOOG -0.87% ) business is driven by online advertising. The company generates revenue from sales of advertisement placements on its own websites (Google.com, Gmail, YouTube, etc.) and from selling ads on third-party websites. Indeed, 84% of Alphabet's $39 billion in second-quarter revenue came from advertising.

But the tech company has other smaller segments that are becoming key growth drivers, mainly cloud-computing, the Google Play app store, and hardware. Together, these businesses make up Alphabet's "Google other" segment, which is growing at more than three times the rate of its advertising business.

On Tuesday, Alphabet's hardware business was given some special attention. The company announced an array of new devices, including headphones, a laptop, a new smartphone, and more.

Alphabet's Pixel 4 smartphone

Alphabet's Pixel 4 smartphone. Image source: Alphabet.

Meet Alphabet's latest hardware

Perhaps the biggest announcement from Alphabet on Tuesday was its new smartphone: the Pixel 4. Like Apple's ( AAPL -1.17% ) latest new iPhones, the main focus seemed to be on the cameras. The backside of the device features two cameras, one of which boasts a telephoto lens. The phone also has a Night Sight feature that enables "beautiful photos in full darkness," the company said in a blog post about the smartphone. Alphabet also cited breakthroughs in speech processing for its Google Assistant that make the voice AI on the device more useful than ever.

The Pixel 4 pricing starts at $799 -- $100 more than Apple's new iPhone 11 but $200 less than the iPhone 11 Pro.

The company also announced AirPod-like earbuds called Google Pixel Buds ($179), a Chromebook laptop called Pixelbook Go ($649), an upgraded Nest Mini smart speaker, and a Wifi router/Google Assistant smart speaker hybrid device ($269 for a two-pack). 

An important catalyst

While Alphabet doesn't break out its hardware sales in its financial statements, the company's "Google other" segment saw revenue increase 40% year over year, trouncing the company's 13% growth in advertising revenue. Further, management has indicated its smartphone sales have been soaring, thanks in part to the launch of a lower-cost Pixel 3a smartphone for $399 in May. Management said in the company's second-quarter earnings call that Pixel unit sales more than doubled year over year during the period. With the Pixel 4, Alphabet likely hopes to keep up this momentum.

Even so, management's discussion of its "other" revenue in its most recent earnings call suggests that its cloud-computing business and Play app store are the primary drivers of the segment.

Of course, there's value in Alphabet's hardware sales beyond the upfront revenue received from the hardware itself. The company's hardware is built as a gateway into Alphabet's ecosystem of AI and software. As Google CEO Sundar Pichai explained earlier this year in the company's fourth-quarter earnings call: 

[We use] hardware to drive where the rest of the computing ecosystem is. And so, we get a very leveraged effect there. ... [F]or example, if you look at something like the Google Home Hub and how it delivers a nice experience across Search, Assistant, and YouTube and Photos.

As long as Alphabet's hardware business is growing nicely and helping users become more active in the company's ecosystem of software and AI, the company will likely keep investing in the nascent business.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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