Has Alphabet's Adoption of Nest into Google Proved Successful?

In fundamental terms, Google and Amazon are leading tech companies with very different purposes.

13:01 23 May 2018

As both have diversified over time, however, these brands have found themselves competing in a number of new and evolving marketplaces.

 

One of the most prominent is the field of Artificial Intelligence (AI) and smart technology, in which Amazon have made considerable gains with their Alexa device. As of the third quarter of 2017, the brand had sold in the region of 20 million Alexa units, with these sales making a huge contribution to the company’s annual earnings report.

 

Amazon's formative movements in this market undoubtedly stirred Google's parent company Alphabet into action, as they acquired smart tech innovators Nest in a hefty $3.2 billion deal four years ago.

 

But has this move proved a success, both from the perspective of the marketplace and GOOGL stock? Let's take a look.

 

Alphabet, Google and Nest – The Story so far

 

When Google acquired Nest in 2014, it represented the biggest acquisition of an energy tech company in modern times. There was good reason for this too, with Nest established as the world's first smart home product that made consumers care about energy usage and consumption.

For a while, Alphabet made the strategic decision to keep Nest and Google as separate entities, under the banner of a single parent company. However, Alphabet finally decided to fold the division back into Google during the first quarter of 2018, while revealing its financial performance for the last 12 months.

 

Interestingly, it was revealed that Nest brought in revenues of $726 million in 2017, while simultaneously losing $621 during the same period. This perhaps underlines why Nest was brought back into the Google fold, with concerns abound that the brand was failing to achieve its full potential in the smart tech marketplace.

 

So, has Nest Proved to be Successful for Google?

 

In pure headline terms, the financials suggest that Nest has failed to deliver the type of growth and profitability associated with Amazon's Alexa devices. These figures also reflect a turbulent two year period for the brand, which has struggled amid sustained infighting, underperformance and a lack of new project innovation.

 

During this time, Nest has failed to deliver the expected boost to GOOGL stock, while dragging the brand's bottom line and creating a public relations nightmare. In short, Nest has not delivered any kind of financial or economic return on the huge investment that has been made by Alphabet, with Amazon threatening to consolidate its dominant position in this lucrative and rapidly growing marketplace.

However, the decision to fold the Nest division back into Google proves that Alphabet remain determined to make this a success, regardless of the challenges that have been laid out in front of them. This will certainly help in terms of efficiency and establishing a clear vision for the future, while it may also help to reduce costs and create higher profit margins for Nest products.

 

Perhaps the real objective of this move is to conceive and create new products for the market, however, as Google looks to fulfil the immense potential of Nest while also boosting it's own hardware revenues and reducing its stocks' reliance on ad sales.

 

There may also be some cause for optimism in terms of recent sales figures, as while Alphabet did not release exact numbers it was estimated that Nest shifted more devices in 2017 than it did during the previous two years combined.

 

The Last Word

 

The message here is clear; as while Nest has not been a runaway success for Alphabet the company continue to make huge investments in its future development.

 

So, in a bid to achieve a viable return on this investment and build on improved sales during 2017, the company has folded the division back into Google and will use this as a foundation from which to realise its potential.

 

Whether this ultimately leads to Google competing more aggressively with Amazon in the home smart tech market or the sale of Nest has yet to be seen, but the move is definitely part of a long-term plan to curb the dominance of Jeff Bazos' brand and their Echo range of devices.