I’ve owned a position in Alphabet for a number of years. In fact back before when it was still Google, and the ‘Other Bets’ were just other bets. I first acquired the position back in late 2018, so its been a nice earner for me.
The metrics today for Alphabet still look just fine, and very healthy. It’s top line growth is in the mid teens (15% to be more precise). Cash flow generation is substantial and operating metrics are healthy (32% margins). The business also pays a nice dividend today as well!.
There is a wall of worry today surrounding the business. Much of this will prove to be unfounded. The DOJ wants to push through a divestment of Chrome from Alphabet, a consequence of the courts finding of Google’s monopolistic power. This can be viewed as a concern on its surface.
Chrome is a proxy into the search patterns and behaviors of billions of internet users. It provides Alphabet with a vast collection of data insights that can be aggregated with other proprietary information and monetized with advertisers. Still, with the DOJ leadership and administration likely to turn over when Trump comes to power, the enforcement of this is not likely to be so stringent, with other remedies more likely to find favor in an out of court settlement.
The bigger issue for me is AI and what happens to the dominance of Google’s search business. The cash cow for Google today, funding a range of unprofitable bets, Google search has a 90% global market share. Bing, Microsoft’s distant #2 is not even close, either in terms of share (4%) or even product experience.
Generative AI is very rapidly leveling this playing field. The quality of deep, contextual search results from the likes of ChatGPT, or Perplexity provide significantly more information today that a bunch of links from Google Search. The product experience is incrementally better. Where these fall down today and distribution and user awareness of alternatives. ChatGPT powering Apple Intelligence will be the start of a sea change in both distribution, and user awareness. Once user behavior starts to change, it will become difficult for Google to stem the breach.
Don’t get me wrong, I have little doubt that Google won’t do well and won’t be successful in AI. It’s just that a bunch of others will also be successful in search because of AI, and will be “good enough” or as good to meet consumer needs. That’s a problem, because Google being significantly better today is what accounts for search centralization and people coming to Google search to look for information.
I expect search will eventually become far more decentralized and contextualized with whatever application or interface that someone is working within. Likely gone are the days when I’ll exit out of my current mode to do a search when I can ask an embedded AI chat bot for information that’s contextually relevant to whatever I’m doing at the time.
Perhaps that experience continue to be powered by Google. More likely though, I think that experience could be potentially powered by a number of folks, notable other big tech players, in addition to the newer AI only entrants like Perplexity or Chat GPT.
Its this prospect that’s enough to give me pause on the Alphabet investment case, even though its still a dominant, cash flow genenerating behemoth at very reasonable multiples today.
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