In the tech world Africa usually ends up as an afterthought. Regardless, a number of new developments are starting to change its prospects. Major infrastructure investments are being made in Africa to provide a stronger internet backbone. Faster internet and more internet connections will help major tech firms take advantage of the continent’s population boom.
Angola GDP Growth data by YCharts
Innovation is Bringing Internet to the Masses
A company backed by Google Inc (NASDAQ:GOOG) recently launched a number of satellites into space. The new satellite network will be strategically placed to cover the entire African continent, along with parts of Latin America to the Pacific Islands. The network is placed relatively close to the earth’s surface to reduce latency and allow fast internet connections. Google Inc (NASDAQ:GOOG) has been experimenting with Wi-Fi networks attached to high altitude balloons. The growing wireless and wired infrastructure is creating the internet backbone that will allow Google Inc (NASDAQ:GOOG) to repeat its success in the world’s second most populated continent.
Simple text messaging is already decreasing the cost of doing business in Africa. Google Inc (NASDAQ:GOOG) is in a great place to take this one step further with its cheap android system. Many Africans do not have large amounts of disposable income, and an Android powered smart phone is a more cost effective computing solution than a full-fledged laptop or an Apple Inc. (NASDAQ:AAPL) iPhone.
The above chart shows that the GDP growth rates of a number of African countries are far greater than America’s GDP growth rate. As computing power continues to fall more Africans will jump on the internet and Google Inc (NASDAQ:GOOG) will be one of the prime beneficiaries, due to its dominant position in the search market. The company needs this growth as its one year earnings per share (EPS) growth rate of 10.3% is far below its three year growth rate of 12.14% and five year rate of 20.45%. With a profit margin of 20.9% and a total debt to equity ratio of 0.07, Google Inc (NASDAQ:GOOG) will have the resources to grow in Africa.
Price is Important
Even though Nigeria is a major oil producer, its yearly per capita income is just below $3000. There is a small amount of consumers who can afford an iPhone, but the majority is choosing Android. Android’s market share has been growing significantly. There is little chance that Apple Inc. (NASDAQ:AAPL) will develop a low cost product for the emerging markets. Apple Inc. (NASDAQ:AAPL) is a luxury brand and makes its money selling a premium product. In order to maintain its brand and image in the developed markets, it needs keep its products priced at a premium.
In order to maintain its current profit margin of 23.5% and earnings before interest and taxes (EBIT) margin of 31.5%, it will be forced to sacrifice potential growth in emerging markets. With a return on investment (ROI) of 29.3% Apple Inc. (NASDAQ:AAPL)is still a very profitable company, but Google’s low cost Android is simply a better product for price conscious consumers.
Social Networking Won’t be Left Out
Facebook Inc (NASDAQ:FB) is growing in Africa. The continent is the second largest in the world and Facebook Inc (NASDAQ:FB) is a great way for to people to communicate across national borders. The social networking giant needs to take a long term view. Africa’s low per capita GDP means that it is unlikely to provide a substantial and immediate boost to Facebook’s revenue. The long run is a different story, as Africa’s internet use and population are expected to grow for decades.
Facebook is still in its growth phase. Its quarterly year over year revenue is up 38%, though its U.S. user growth has tapered off. Regardless, the company has decided to plow most of its profits back into the company. Its ROI 0.5% and profit margin of 1.2% are not sustainable in long run, but Wall Street expects that it will be able to boost its 2014 EPS to $0.58. As the developed Western markets settle down, Africa will be a precious source of growth for Facebook.
Conclusion
Africa is on the rise, and improvements to its internet backbone are paving the way for Google and Facebook to benefit. African growth will help boost their earnings, as growth in more developed markets taper off. Apple Inc. (NASDAQ:AAPL) will have a hard time in Africa. Its expensive products are a hard sell to price constrained consumers.
The article Africa Is Tech’s Next Frontier originally appeared on Fool.com.
Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends Apple, Facebook, and Google. The Motley Fool owns shares of Apple, Facebook, and Google. Joshua is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
