Google Seeking The Trifecta Of Hardware, Software And A.I.

Eric Sheridan of UBS has a simple formula that explains Alphabet Inc GOOG GOOGL's future: "Hardware + Software + AI = Future Google."

In a report published Wednesday, Sheridan stated that Google announced during a presentation on Tuesday a new set of hardware devices which are intended to integrate the company's software and application innovations, including Google Assistant which "will rise in importance" heading forward.

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Google's increased focus on hardware based on its new devices signals a shift away from Google's prior strategy of relying on manufacturers to design the Android and Chrome ecosystem. Today, Google is now in a better position to compete against the likes of Apple Inc. AAPL and Amazon.com, Inc. AMZN in the "escalating battle for mobile/home computing."

However, Sheridan acknowledged that while Google is now in a better position to better control the user experience for its services, questions remain unanswered as to how other manufacturers will "digest Google's newfound role in the marketplace."

In addition, the analyst cautioned that while Google's new products are price competitive relative to their competition, the new "go-to-market" is a "clear hurdle to wide acceptance" and will require investments in brand, marketing and distribution to overcome.

Bottom line, Sheridan concluded that any success in Google's new hardware products could drive revenue upside it would also likely be paired with margin pressure.

Shares of Alphabet remain Buy rated with an unchanged $925 price target.

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