UBS Global Research analysts Eric J. Sheridan, Vishal J. Patel and Timothy E. Chiodo maintain a Buy rating for Google Inc (NASDAQ:GOOG) as the tech giant will continue to own the majority of the Motorola patent portfolio after selling Motorola Mobility smartphone business to Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) (HKG:0992).
Google announces agreement to sell Motorola to Lenovo
Yesterday after the market closed, Google announced it has agreed to sell its Motorola Mobility smartphone business to Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) (HKG:0992). The $2.9b sale price consists of a $1.41b payment to be made upon deal closing ($660mm in cash + $750mm in Lenovo ordinary shares), with the remainder ($1.5b) being paid via a 3-year promissory note. After the deal, Google will continue to own the majority of the Motorola patent portfolio, while Lenovo will receive direct ownership of ~2k patents (a minority of the total portfolio) and licensing rights to the entire portfolio. The deal is pending regulatory approval – we will look to an update on close timing on tomorrow’s call.
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Google’s hardware strategy going forward
Given the recent 10-year cross-licensing patent agreement between Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) and Google Inc (NASDAQ:GOOG), we believe that it became less important for Google to play “IP defense”. We have long held a view that devices are a scale game – with the limited success of Moto X & G, we found it more difficult to see a path to profits (hence the recent downtick to our estimates within this business). Going forward, we expect Google to focus on Nexus & Chrome hardware manufactured by third-party OEMs.
Motorola-Lenovo transaction very shareholder friendly
The sale of Motorola removes a lower growth (8.5% ’13-’15E revenue CAGR vs. Google stand-alone net revenue CAGR of 21% for the same time period), lower margin hardware segment from Google Inc (NASDAQ:GOOG)’s business mix. Based on our ests, Motorola was on pace to produce ~$2.8 b in operating losses ’13-’15. Specific to ’15, we had est ~$900mm in operating losses – the elimination of which would drive Google’s total company operating margins roughly 450bps higher (from ~37% to ~42%). Further, we believe it is likely that investors will pay a higher multiple for a business less focused on a loss leading device manufacturer and acts in accordance with shareholder friendly policies.
Google’s Stock Valuation
Our $1,300 price target for Google Inc (NASDAQ:GOOG) is based on our weighted avg. approach (EV/Sales, EV/EBITDA, EV/FCF).