Google's hardware business is finally shaping up, says RBC

While Google's parent company Alphabet is still undeniably an advertising company, Google's hardware business is finally shaping up, according to RBC.

The companies line of products, which includes its Home smart speakers, Chromecast streaming devices, Nest cameras and thermostats and line of Pixel smartphones have "gained critical success and are starting to gain material commercial traction," RBC analyst Mark Mahaney wrote in a note to clients Thursday evening.

In earnings reports, Alphabet lumps hardware sales into an "other revenues" category that also includes its cloud business and app store sales, instead of parsing out how much any of those individual categories book. In Q3, the entire category contributed about 14 percent of Alphabet's total revenue, while advertising accounted for 85.8 percent.

RBC said that Google's recent hardware successes, including the growing popularity of smart speakers and rave reviews for its expensive Pixel phones, will lead to increasing revenues and profit. RBC projects that in 2018 the hardware segment will generate a combined $8.8 billion (or 6 percent of gross revenue) and a profit of $3 billion (or 4 percent of gross profits), and will rise to $19.6 billion (or 8 percent of gross revenue) and a profit of $6.1 billion (5 percent of profits) by 2021.

RBC also estimates that there are 43 million Google Home devices currently installed in the U.S. and 9 million internationally.

While Google hasn't previously had breakout hardware success (and in contrast, has had some dazzling failures, including its Glass facial computer), the category is increasingly becoming a fundamental part of its future, RBC says.

"Hardware remains a small, but important part of Google given its potential as a key growth avenue and strategic hedge for the company," Mahaney writes.

While Mahaney sees revenue and profits growing, the real value of Google's hardware is that it provides a platform for it to develop and deploy its artificial intelligence chops and gives it more ways to serve ads. Morgan Stanley analysts have actually recommended that Google should give its Home Mini devices away for free in order to defend its retail ads turf.

Here's how RBC predicts the revenue breakdown between Google's device lines. Unsurprisingly, the Home smart speakers are predicted to reel in the most revenue:

RBC's price target for Alphabet is $1,400.

WATCH: Google's Larry Page has backed two flying-car start-ups — here's a look inside one of them

Let's block ads! (Why?)

from Top News & Analysis https://cnb.cx/2QJEKlu