Why Google Re-Integrating Nest Makes Perfect Sense

It's now been just over two years since Google restructured as Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), in an effort to simultaneously ensure autonomy for its moon-shot bets while also providing investors with greater transparency into how those bets are going. Of all the subsidiaries that were placed into the "Other Bets" category, Nest was among the more meaningful. Google acquired Nest in 2014 for $3.2 billion, which was among the main revenue generators within Other Bets.

It now seems that Alphabet and Google are thinking about moving Nest out of Other Bets and putting it back under Google's umbrella, according to The Wall Street Journal.

Google is dead serious about hardware

The speculation comes as Google's hardware ambitions have reached unprecedented levels. The search giant now creates more first-party hardware than ever before, and that's not going to stop anytime soon. In particular, the hardware event in October featured a growing portfolio of smart-home devices, adding the $49 Google Home Mini and $349 Google Home Max to the mix.

Yet Nest continues to expand its own portfolio of smart-home products, announcing no less than six new products in September, including a smart doorbell (Nest Hello), indoor and outdoor security cameras (Nest Cam IQ), and even a home security system (Nest Secure), among others.

As Google's smart-home products and Nest products are seeing increasing overlap in their portfolios, it makes perfect sense to reintegrate Nest so that the teams can collaborate better in areas like product development and marketing. Google Home devices already work with Nest products to some degree, but the company could really take it to the next level by merging the teams. Marketing teams from both Nest and Google are often communicating with the same retailers to distribute products, according to the report.

Nest now has approximately 1,000 employees, which would be a strong addition. Google announced in September that it was acqui-hiring HTC's Pixel team for $1.1 billion, which will add about 2,000 employees to the search giant's hardware team. Google's hardware team is expanding in lockstep with its growing aspirations to make first-party hardware to better compete with Amazon.com's market-leading Echo portfolio.

It's less clear how Google would approach marketing and branding. Nest already enjoys a reasonably strong brand in smart-home technology, while Google's devices all share the Google Home brand. There could be an opportunity to consolidate the branding under one product family, although it's not like disjointed branding has ever bothered Google that much (the company has nearly a dozen apps and services related to messaging and communication).

Smart-home technology is no longer a speculative niche

Consider how Alphabet CEO Larry Page opened his letter to shareholders when announcing the Alphabet restructuring (emphasis added):

While most of these "smaller bets" have been now placed into the "Other Bets" segment in line with this sentiment, Nest is becoming a fairly large bet on an area that does not seem "very speculative or even strange" anymore. Smart-home technology is an important trend that all of the tech giants are exploring, and will prove to be a core aspect of their respective ecosystems. Nest should be a part of Google (again).

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and AMZN. The Motley Fool has a disclosure policy.