Next Big Thing In Smartphones Could Be Coming From Google

It appears the next big thing in smartphones is coming neither from Samsung nor Apple but from Google .

Last week at All Things D, Dennis Woodside, CEO of Motorola, announced Moto X.  Moto X may turn out to be the next big thing in smartphones because of the emphasis on making the phone ‘self-aware.’  Woodside neither showed the phone nor described it in enough detail to make a conclusive judgment about its prospects.  Having said that, the concept of self-awareness of a phone takes the ‘smart’ in a smartphone to the next level.

The following examples illustrate what self-awareness means:

• According to Woodside, “The new phone will know when you take it out of your pocket.”
• The phone will learn when you are about to take a picture and it will open a camera app by itself.
• The phone will know when you are traveling in a car.

Woodside did not bring it up but there are considerable synergies between the concept of the self-awareness and Google Now.  Google Now tries to anticipate the user’s needs and acts as an intelligent assistant.  For example, Google Now reminds the user of things important to the user when the user is at a certain location.  (For background on Google Now, please see Google Now Recovers Apple's Siri Fumble.")

Motorola used to own a large semiconductor operation that was spun off into a company now known as Freescale Semiconductor.  One of the strengths of this semiconductor operation was semiconductors used in receiving data from sensors and using such data in control systems for energy, industrial and automotive applications.  Semiconductors are now extensively used to monitor and control every aspect of a car by all major manufacturers including General Motors and Ford.  For control of airbags, one of the first microelectromechanical systems employing inertial sensors was produced by Motorola.

It is not clear how much of the heritage relating to sensors and control systems is still in the Motorola operations that Google acquired.  However, it goes without saying that such expertise, if they still exist within Motorola, will give Google a leg up over Apple.

Google will face a couple of obstacles. First, global market share of Motorola is very small.  Second, Google will risk alienating the likes of Samsung and HTC if it tightly integrates Google Now with Moto X and such facility is not available to other Android phone manufacturers.

Google potentially has a marketing game changer in its pocket. The game changer is ‘Made in America.’  At present, no smartphone is made in America.  Woodside said, “Moto X is the first smartphone that will be made in the U.S. We’re building it in Texas.  We are going to employ about 2,000 people outside of Fort Worth at a 500,000 square foot facility. That’s a plant that once made phones for Nokia and at one time employed 6,000 people.”

There is a considerable momentum behind Google stock.  The thinking is that Google trades only at a forward P/E of 16.5 and five year expected PEG ratio is only 1.27.  Google stock has recently been upgraded by many firms.  RW Baird raised its target from $830 to $1025, Argus raised its target to $1065 from $875, and Morgan Stanley raised its target to $996 from $932.  The positive sentiment generated by Moto X may help Google stock reach $1000.

It is interesting how quickly things can turn in the world of investments.  It was not long ago that many firms were assigning a near $1000 target to Apple and no major firm had a $1000 target for Google.  Now, targets have been cut for Apple and raised for Google.    On any pullback close to $800, Google will be a buy if nothing fundamental changes.

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Disclosure: Subscribers to The Arora Report have long positions in Apple and Nokia.