Services and software
What I really like is that all my Google Inc (NASDAQ:GOOG) services are integrated through my Gmail account. I know that the service is no longer unique, but myself and most people I know are most comfortable with Google’s services. Google is always expanding these services and offering new and innovative things. YouTube has evolved significantly as has the entire array of online Google Inc (NASDAQ:GOOG) products, like its online productivity suite and services like Google Drive.
Google Inc (NASDAQ:GOOG), like other companies I respect, such as Apple Inc. (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT), tries to do something new. Google is leading the way with Google Glass and self-driving cars. Glass is an example of a device whose success will be tied to what services are available on it.
In my opinion, the iPhone’s success was driven by apps and not its hardware after the first generation, but I think Apple Inc. (NASDAQ:AAPL) has stagnated on the App front, and I see increasing complaints about some of the limitations Apple Inc. (NASDAQ:AAPL) imposes on its Apps along with the approval process. If Apple Inc. (NASDAQ:AAPL) has one flaw, I would say it is on the software and service side because its hardware and design is impeccable, though I will admit Siri shows promise.
Google Inc (NASDAQ:GOOG)’s strength is software and services, and it works with companies like Samsung or LG for hardware, which prevents hardware from becoming its Achilles heel. Every iteration of the iPhone is less of a technological marvel from a casual consumer’s point of view, while still being technical achievements. Nothing is hitting consumers quite like the move from candy bar or flip phones to the touch screen on the first iPhone. As time passes, iOS, while extremely user-friendly, feels extremely rigid and constraining. That is why I am making the switch to Android.
Innovation aside, advertising is the most important revenue source for Google Inc (NASDAQ:GOOG). The cynical interpretation is that nothing else Google does has yielded any money. I know people that search Google even if they know the address, because it is easier. Advertising accounts for around 90% of revenue because so many people use Google Inc (NASDAQ:GOOG). It’s revenue has been increasing, so, I do not see the company making its money from advertising as a sign that Google should just stop trying to do new things. It just means that the original basis for the business is still a great one.
Recurring service billing
Companies need to try new things in order to keep from being obsolete. Google Inc (NASDAQ:GOOG) has not been confronted with this yet, but Adobe Systems Incorporated (NASDAQ:ADBE) faced some trying times with flash being excluded from the iPhone. Now, it is moving to a subscription model, which is a huge transition. The company is also ambitious about its goals regarding subscribers. Applications-as-a-service has become the norm, especially for the expensive applications that Adobe Systems Incorporated (NASDAQ:ADBE) has.
I really like the “as a service” model, because it really lowers some of the barriers to entry for people. Photoshop used to cost a lot, and if you wanted to start a photography business, whether it is a physical location, on the web, or just freelance. Now you can get started with the subscription. It lowers the upfront costs. The move to a subscription model means that the company will have a lot of its revenue deferred. The hope is that it will accumulate over time to show some great earnings. In the mean time, I think the revenue and EPS metrics will be misleading. When someone buys a year’s subscription, they pay upfront, but the company recognizes it over the year.
Revenue has been in a solid uptrend, but the move to subscription might ruin the trend superficially. Looking at cash flow will solve this problem. The number will be in cash from operations, but might have a separate line item such as cash received as deferred revenue or something similar.
Services are as good as goods
The “as a service” model is being used by Amazon.com, Inc. (NASDAQ:AMZN) as well. I like the leasing of compute capacity a lot. “Infrastructure as a Service” is a phrase that strikes me as one of most powerful I have heard regarding tech. The implementation might be more impressive than the concept itself, but the idea of leasing out infrastructure, which can cost millions or more, is amazing. When it comes to products that require servers, the upfront cost for infrastructure that the company may or may not need has to be budgeted for.
If you develop a fantastic product, the demand might outstrip your current capacity. Unless you have a large amount of capital to take the upfront risk, it is not feasible. If I create an application, I might think I get 100 users in the first few months, but if the software is highlighted in a large magazine, I might start seeing hundreds of users or more right after the article breaks. It would be terrible if those people could not use the application.
Revenue from infrastructure as a service is rolled into “other revenue” on the earnings reports, as is everything in Amazon Web Services. The growth at web services is expected to be huge, and could finally lead Amazon.com, Inc. (NASDAQ:AMZN) to glorious profits. It is growing very rapidly, and I expect it to become an increasingly important part of Amazon’s business.
Conclusion
I have no idea what I would do with these stocks.
Amazon.com, Inc. (NASDAQ:AMZN)’s valuation has kept me on the sidelines for a very long time. Both Amazon.com, Inc. (NASDAQ:AMZN) and Google Inc (NASDAQ:GOOG) innovate like crazy. They are just out of my normal price range in absolute terms, but I might check out some options if they are priced right. Adobe Systems Incorporated (NASDAQ:ADBE) strikes me as a straight long position. However, the risk in Adobe is if it does not attain its target of 1.25 million subscribers by the end of 2013.
But then, Adobe Systems Incorporated (NASDAQ:ADBE) is probably most in line with my natural proclivities. The transition it is undergoing creates opportunity, especially if the stock gets some short-term bad news, while the long-term picture stays intact. The market tends not to think long-term, at least lately, and that creates opportunity.
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