This article originally appeared on Real Money on Nov. 28, 2016.
Though Alphabet's (GOOGL) Google has had substantial non-advertising revenue streams for some time, they've never been substantial enough for a company of its size to be viewed by Wall Street as something more than an online advertising play. While non-ad businesses might get some lip service in analyst reports, it has ultimately been ad sales -- and search ad sales especially -- that formed the heart of bull and bear cases about the company, and which determined how its shares moved after an earnings report.
That might finally be set to change a little, thanks to burgeoning hardware, cloud service and app store revenue streams. A pair of reports on Monday help drive this home.
In a report reiterating an Overweight rating and $950 target for Google parent Alphabet (GOOGL) , Morgan Stanley's Brian Nowak forecasts Google's just-launched Pixel phones -- the 5-inch Pixel and 5.5-inch Pixel XL -- will produce $2 billion in revenue this year via three million unit sales, and $3.8 billion in revenue next year via five to six million units.
Nowak also estimates the phones will have gross margins in the range of 22% to 25%. Given manufacturing costs aren't believed to account for more than 40% of revenue, the gross margin estimates feel low even after accounting for non-manufacturing costs such as royalties and warranty expenses.