Google: Foldable Phone Isn’t Major Catalyst

Summary:

• Google will reportedly launch Pixel Fold in June.
• Search leader has been a smartphone laggard for years.
• Valuation lags behind that of large-cap tech peers.

After the bell on Tuesday, CNBC reported that search giant Google (NASDAQ:GOOG) (NASDAQ:GOOGL) will launch a foldable phone in the next few months. As the company looks to potentially diversify its revenue streams outside of its key search business, this is a major step on the hardware side of things. Unfortunately, Google’s smartphone strategy to date has been less than impressive, making me believe that the latest effort won’t do much for shareholders.

The report suggests that the new phone will be announced at the company’s annual developer’s conference on May 10th, with the formal launch sometime in June. The outside screen is expected to measure 5.8 inches, but will open like a book to form a tablet-like 7.6 inch screen. That would put it as the same size as competitor Samsung’s (OTCPK:SSNLF) Galaxy Z Fold 4, although the Google Fold is supposed to be heavier due to a larger battery.

The device could be priced at $1,799, similar to the Samsung one, although Google is apparently offering numerous incentives according to the CNBC article above. Another set of rumors suggests it could go for less than that, but still be at least $1,300. Either way, this is definitely a premium device, going for at least double or triple what many of Google’s current Pixel phones go for.

The CNBC article discusses Google taking a shot at Samsung here as questions arise about the relationship between the two. Recently, it was reported that Samsung could be ditching Google Search as the default on its phones in favor of Microsoft’s (MSFT) Bing. While this could be a $3 billion annual revenue loss, it’s only a small fraction of Google’s overall sales. The more important relationship is with Apple (AAPL), which reportedly gets around $20 billion from Google a year to be the default search engine.

I’ve long thought there was an opportunity for Google to make inroads against Apple in the phone business, but the overall Pixel line has been less than impressive to date. The original Pixel line was only available at Verizon (VZ), limiting the potential customer base, and while that has since changed, it doesn’t seem like Google really wants to be a mass market phone maker. One article late last year provided some key numbers on this situation:

In a world dominated by iPhones and Samsung phones, Google isn’t a contender. Since the first Pixel launched in 2016, the entire series has sold 27.6 million units, according to data by analyst firm IDC — a number that’s one-tenth of the 272 million phones Samsung shipped in 2021 alone. Apple’s no slouch, having shipped 235 million phones in the same period.

Given Google’s limited phone sales to date and the premium price of the Fold, what is their hope here? Even two million units a year, which may not be realistic given last year’s entire market was only estimated to be around 14 million units, would barely push the revenue needle. That sales level would only be enough to offset the potential search loss from Samsung if it happens. I don’t know if the time and resources to get this to market would be worth it in the end. Additionally, Apple has been working on a foldable phone for some time, so if that gets to market, you know that Apple will do what it can to make sure it is a big hit.

Over the last year, Google shares have lagged their two big cap tech peers, falling around 18% while Apple and Microsoft are both up slightly. Google is coming off a year where revenues rose nicely but GAAP earnings dropped, as the company continues to spend heavily on its future. Moving forward, analysts see Google reporting decent revenue and earnings growth, but that doesn’t mean the stock is getting a premium valuation. Google trades at around 21 times this year’s expected earnings, whereas the other two giants are both in the high 20s for their P/E’s based on current estimates. As a point of reference, Google has reported three straight revenue misses along with four earnings misses, a trend that it will look to reverse this year.

It was reported this week that Google is about to announce a foldable smartphone, but investors in the stock shouldn’t see this as a major catalyst. While the premium offering may be nice for some tech enthusiasts and those looking for something different, the high price point and Google’s limited phone efforts to date suggest it won’t be a major revenue driver. If the company really wants to build out future revenue streams to limit its dependence on search, it needs to do a lot more on the hardware side. The only positive here is that Google isn’t as expensive as its major large cap tech peers, but that’s partially because the stock has underperformed lately due to multiple revenue and earnings misses.

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