Google has paid an astronomical price ( $3.2 B) for acquiring Nest labs when compared to its 12 month trailing revenue - annual revenue of Nest is presumed to be ~ $300m.
A 10x revenue multiple is unheard of for an electronic appliance whose gross margins are likely in the 40% range. So why did Google pay such a huge price?
The answer to this question lies not in the standalone business of Nest, but what is feasible under Google's umbrella. So the so-called synergy for Google is what makes up the difference ... a significant difference indeed which in my opinion no other company is in a position to realize (except may be Apple). For one, Google is at the forefront of big data having successfully managed , analyzed and processed petabytes of data while supporting billions of requests from customers across the world. So it has more or less mastered the art of human interaction around search. This is bound to amplify with the progression of networked devices adding a new dimension ... you will see a lot more machines contribute and consume information just like humans and in most case lead to increased automation - Analysts term this phenomenon as Internet of Things
Nest is at the cutting edge of Internet of Things (IOT) from a customer stand point .. having revolutionized the way people use thermostats and smoke alarms, Nest is intent on expanding its product portfolio and building an ecosystem of networked devices for a family. This consumer focus aligns perfectly with Google's culture and ecosystem. Further Google's existing infrastructure will help scale and extend the reach of Nest... while Nest's relationships with retailers such as Lowes and Home Depot will complement and extend Google's Go To Market options.
Just like YoutTube, this acquisition is bound to be a significant winner in the long run and this deal in my opinion is a win win for both Google and Nest.
A 10x revenue multiple is unheard of for an electronic appliance whose gross margins are likely in the 40% range. So why did Google pay such a huge price?
The answer to this question lies not in the standalone business of Nest, but what is feasible under Google's umbrella. So the so-called synergy for Google is what makes up the difference ... a significant difference indeed which in my opinion no other company is in a position to realize (except may be Apple). For one, Google is at the forefront of big data having successfully managed , analyzed and processed petabytes of data while supporting billions of requests from customers across the world. So it has more or less mastered the art of human interaction around search. This is bound to amplify with the progression of networked devices adding a new dimension ... you will see a lot more machines contribute and consume information just like humans and in most case lead to increased automation - Analysts term this phenomenon as Internet of Things
Nest is at the cutting edge of Internet of Things (IOT) from a customer stand point .. having revolutionized the way people use thermostats and smoke alarms, Nest is intent on expanding its product portfolio and building an ecosystem of networked devices for a family. This consumer focus aligns perfectly with Google's culture and ecosystem. Further Google's existing infrastructure will help scale and extend the reach of Nest... while Nest's relationships with retailers such as Lowes and Home Depot will complement and extend Google's Go To Market options.
Just like YoutTube, this acquisition is bound to be a significant winner in the long run and this deal in my opinion is a win win for both Google and Nest.
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