Alphabet's Google Signs Patent Licensing Deal With Tencent

Alphabet Inc.'s (NASDAQ:GOOGL) division Google recently signed a patent licensing deal with Tencent Holdings Ltd in an attempt to find ways to grow in China, the second largest economy, where many of its products have been discontinued.

The cross licensing deal with Chinese social media and gaming firm, Tencent will allow the companies to come together and create new technologies. Though Google hasn’t disclosed the scope and financial terms of the patent deal but it covers a wide range of products.

Google has entered into similar agreements before with companies like Samsung Electronics (KS:005930), LG Electronics and Cisco Systems (NASDAQ:CSCO). However, this is the first time that it has collaborated with a large Chinese technology firm. According to Google, such agreements reduce the possibility of litigation on patent infringement.

Google's head of patents, Mike Lee said, "By working together on agreements such as this, tech companies can focus on building better products and services for their users."

Notably, shares of Alphabet have gained 37.1% in the past 12 months, outperforming the 26.8% rally of the industry it belongs to.

Why this Deal?

Despite a strict Chinese policy that imposes restrictions on foreign firms, including censorship, the search giant has been trying to rebuild its presence in the market.

Google has undertaken many initiatives like sharing its artificial intelligence software, investing in local projects like AI research lab and introducing a version of its translation app to get back to business with China.

We believe Tencent will turn out to be a key ally for Google as it operates China’s widely used social media and payments app, WeChat and its most famous app store. Tencent is also quite famous for hosting the largest gaming and livestream platforms in the country. With Tencent’s push, the tech giant can make its way into China.

Why is China Important for Google?

Google has had a bad history with China. Since 2010, Google’s search engine has been banned in the Chinese market along with its app store, email and cloud storage services. The company is losing a lot of revenues because of these restrictions.

When Google exited China back in 2010, the company had 36% share of search advertising and online ad spending was $3.7 billion. During that period, the company used to generate roughly $300 million every year from China. Since its exit, total ad spending in China has skyrocketed. Last year, ad spending in China was $84.4 billion, according to WPP (LON:WPP)'s GroupM.

Owing to the ban on Google Play, the company is missing out on potential revenues too. According to App Annie, Chinese consumer spending on applications is ballooning up. People spent nearly $35 billion on apps in 2017 and this aggressive growth is expected to continue in the upcoming years.

Clearly, Google doesn’t want to miss out this opportunity. The Information reported that the company has plans to introduce a censored version of Play Store in China by partnering with a Chinese company, Netease. This shows how keen the search giant is to get back to China.

Zacks Rank & Stocks to Consider

Alphabet has a Zacks Rank #3 (Hold)

A few better-ranked stocks in the broader technology sector are SMART Global Holdings, Inc. (NASDAQ:SGH) , Analog Devices, Inc. (NASDAQ:ADI) and Mellanox Technologies, Ltd. (NASDAQ:MLNX) , all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

SMART Global Holdings, Analog Devices and Mellanox have a long-term expected earnings growth rate of 15%, 10.40% and 16%, respectively.

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