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Google Fiber Holds Big Potential for GOOG Stock

Google (GOOG) remains very much beholden to its advertising business. But while the short-term remains reliant on ads, the long-term performance of GOOG stock could be riding on its current Google Fiber efforts.

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What is Google Fiber? Simply put, it’s a high-speed Internet network that Google is building to service select regions of the U.S. right now.

And while Google earnings and revenue will continue to be driven by Internet advertising for the near future, the idea of building Internet infrastructure down the road makes a lot of sense.

For starters, GOOG stock will get a reliable subscription-generating business out of Google Fiber and put it in the same camp as telecoms like AT&T (T), Verizon (VZ), Time Warner Cable (TWC) and Comcast (CMCSA) that provide Internet access. And for income investors, as Google matures, investors might start demanding that GOOG stock start paying a dividend — and like all “utility” stocks, a monthly subscription-based service with low turnover is a great way to generate reliable revenue and support a dividend.

Of course, the naysayers will point out that existing telecoms won’t roll over and die — and anyway, the Google Fiber revolution is still a long way off.

However, investors could start to see a real effect on GOOG stock in the next few years. Here’s why:

Google Fiber Is Working

In a proprietary survey, Bernstein Research went door-to-door in the Google Fiber market of Kansas City to find out just how many people signed up. The results, as senior analyst Carlos Kirjner writes, were “much higher than we had expected: in medium-to-high income neighborhoods, Google Fiber is capturing 75% of homes passed; in low-income neighborhoods, our survey points to a penetration of nearly 30%.”

That is hardly a gimmick product; 30% penetration across the board is a serious business with serious potential.

Now, Bernstein’s research note is quick to say that the potential for tens of millions of homes on Google Fiber is only possible “in the fullness of time” and that there are “many hard-to-overcome challenges.” However, there is real potential based on the small-scale success in Kansas City.

The competitive response from Big Telecom in regards to price and speed on their networks will be interesting to watch. But it’s not unrealistic that Google Fiber could be profitable even if competitors like Comcast ramp up. After all, as many as 34 new cities could soon join the Google Fiber ecosystem in the next few years.

Broadly, Google Is Moving Beyond Advertising … And That’s Good for GOOG Stock

In Google earnings released in April, the tech giant reported total ad revenue of $13.9 billion — almost 90% of its $15.4 billion in total sales on the quarter.

However, as Google matures, investors have started looking at other areas of long-term potential that could drive future growth for GOOG stock. Consider that “other revenues” on the quarter jumped from $1.05 billion in Q1 2013 to $1.55 billion in Q1 2014 — a 50% increase. And while advertising still is growing and is the biggest piece of the pie by a lot, Google has lots of other pockets of possibility.

The obvious one is the Android smartphone operating system, which is the most dominant platform in the world. While Google isn’t in control of the hardware (and profit margins) that Apple (AAPL) enjoys with its iPhone, the dominance of GOOG on the software side has great potential in a mobile age.

There are also quirky projects getting a lot of press, from Google Glass wearable tech to the Chromecast streaming video device.

The fiber optic communications network Google is building falls into this “other” camp. And it’s clear Google has a will to grow this revenue stream ambitiously.

Sure, Google Fiber is an expensive undertaking that will take a while to bear fruit. But when you have $60 billion in cash and short-term investments, innovative staff and a burning desire to disrupt the status quo … well, I’ll side with GOOG stock on this trade.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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Comments
  • jnffarrell1

    If 25% is break even, 75% signup for the $70/ month service will return so much cash, that Google can double its investment out of Fiber cash flow every two years without ever touching advertising cash.

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