The stock market has spent the last year predicting the demise of Alphabet Inc. (NASDAQ:GOOG, NASDAQ:GOOGL), aka Google, due to the generative AI threat from OpenAI. Google has long been a leading investor in AI technologies, and the company appears back on track after the I/O developer conference. My investment thesis remains Bullish on the stock, though the recent rally above $175 doesn’t offer the deep discount anymore.
The biggest fear for Google is generative AI technology from OpenAI and Microsoft (MSFT) supplanting their leadership position in Search. Search is by far the largest revenue and profit driver for Google, and users obtaining answers from ChatGPT or CoPilot could quickly replace valuable searches on Google.
The company has turned Gemini into a Search Generative Experience to make the current search experience more natural, personal, and impactful. The hope is that the Google Search user base continues using Google and starts incorporating generative AI tools into existing searches, eliminating the need to utilize ChatGPT.
Google maintains a nearly 91% market share in global Search in April 2024, though the amount is down from nearly 93% from a year ago. Bing has reached nearly 4% of the global market with the U.S. version now claiming 8% market share.
Google generates nearly $200 billion in annual sales from the advertising business attached to Search. Data continues to show the search tool controlling over 90% of the global market, though the data isn’t clear whether it fully incorporates the market share for all searches, such as those done on OpenAI chat tools.
The good sign that AI is either boosting revenue, or at least not impacting the business, is that both the Search and Cloud segments are reporting accelerating growth with strong Q1’24 numbers as follows:
Another way of checking on the Search market impact is to view the revenue growth rates from this segment. In Q1, sales growth accelerated to 14.4% after bottoming out in Q4’22 with a slight sales decline.
Oddly, OpenAI launched ChatGPT in November 2022. The data possibly suggests the AI excitement led to growing demand for Search and Google participated as a byproduct and has now grown further due to the incorporation of generative AI tools into Search with the latest addition of Gemini to help further spurn growth.
Of course, the 2022 numbers had tough comps with the company reporting massive growth during the Covid boosts of 2021 through early 2022. As highlighted above, Q4’22 faced the tough comp of 35.7% growth back in Q4’21 on top of strong growth in Q4’20 not included in the chart.
Google remains the best way to play generative AI due to the technology released at the I/O conference and the cheap valuation of the stock. The company should benefit on multiple fronts, with boosted Search demand from AI and Google Cloud seeing further upside demand to build on a business already heading towards $10 billion in quarterly revenues. Investors should use the current price to own Google and definitely load up on any weakness.
The key investor takeaway is that Google remains cheap, even at all-time highs. The tech giant is no longer the major bargain of the last several years, but the company is successfully navigating through the AI minefield to come out a winner despite initial missteps.
