Best Ideas Newsletter holding Google (click ticker for report: ) is on the brink of making a big splash in the map space, as it is reportedly set to acquire social map application Waze for $1.3 billion. This comes after months of speculation that Apple (click ticker for report: ) and Facebook (click ticker for report: ) were also bidding to acquire the Israeli-based tech company. Although Google Maps remains a highly-regarded product, Waze is a step in a different direction.
Waze differs from other map applications because it harnesses user-submitted data (largely via GPS) to provide real-time traffic and driving updates. The application provides data on traffic flow, accidents and other specific events that could slow traffic, information on red light camera locations, and also police officer locations. Without question, the application is more valuable in dense urban areas with more users, but the application also functions as a basic maps application.
$1.3 billion seems like an awfully high price tag to pay for a free app with poor revenue generation, but no price paid seems to surprise us in the tech realm (remember price differs from value). We think the social idea could easily have been created for any maps application with a huge user base, but it might be easier for Google to simply roll Waze into its existing product. The efficacy of Waze increases with its network of users. The map space is surprisingly competitive with the likes of Google, Facebook, and Apple all battling to be the maps application of choice. Maps can act as a driver for increased usage (Facebook) or a stickier ecosystem (Google and Apple). Not only does Waze potentially strengthen Google’s map offering, but it also prevents rivals from integrating Waze. Even the timing can be seen as defensive since the deal will be announced in the midst of Apple’s Worldwide Developers Conference.
Because Google is so large, this acquisition does little to change our long-term view on the company, and it will not have an impact on our valuation. Google still has upwards of $50 billion in cash and equivalents, so spending $1.3 billion won’t materially impact the company’s financial standing. More than anything, we view this as a move to strengthen the competitive position of the Android ecosystem against iOS. Relatively small deals like these can have a much larger impact if they help to create a stickier user-base, but such an impact is almost impossible to measure. We believe shares of Google have further upside from current levels, and we continue to hold the firm in the portfolio of our Best Ideas Newsletter.