Alphabet (NASDAQ:GOOGL) is one of the important corporations that will be impacted by emerging AI techniques. Bill Gates has stated in an interview that AI will render Google Search useless. Other experts, such as Lloyd Walmsley of UBS, expect that AI tools would reduce advertising revenue since people will get answers from AI without having to visit the original website. As a result, the analyst downgraded Google Stock from Buy to Neutral.
This assumption, however, is likely to be incorrect because all AI tools rely on data from other sources. As a result, the original content is extremely valuable in the development of any AI solution. In a previous piece, it was said that Google is establishing a solid recurring income foundation, which should protect the company from short-term headwinds.
Google is also quite adept at monetizing new platforms and technology. This has been observed in smartphones, applications, YouTube, and other possibilities. Another significant moat for Google is that it is the default search option for the majority of devices, preventing competitors from gaining market share by introducing a new AI tool.
Google’s Cloud division, which generated $7.5 billion in quarterly revenue or $30 billion in annualized revenue rate, will benefit greatly from AI. To take advantage of pricey AI computation, many more on-premises IT functions would need to be moved to the cloud. Even at a moderate 25% YoY growth rate, Google Cloud should reach $150 billion in annualized revenue by 2030. Google has the lowest future PE ratio among large tech companies, which boosts investors’ long-term return potential.
Is Google Search Under Attack?
Google’s advertising business is the company’s bread and butter. Google’s advertising business accounts for over 80% of total revenue. As a result, any threat to this cash stream is exaggerated by Wall Street. Several analysts have identified AI use cases that will reduce Google’s advertising click-through rate. New platforms and technologies in recent years have also generated concerns that Google’s market dominance in Search could dwindle. The rapid rise of cellphones posed the greatest threat. However, by becoming the default search option for iPhone and Android users, the corporation has developed a strong moat in smart devices.
Google maintains its market share in comparison to Bing and other competitors.
Over the last decade, Google has maintained a market share of more than 90% in search engines. The AI threat does not pose a significant risk to the organization. The bigger issue for Google is that its search engine may be viewed as monopolistic by regulators, who may seek larger fines from the corporation.
The claim that AI would answer consumers’ questions without them having to visit the original website does not appear rational. AI generates responses based on the prior information available to it. This necessitates current information from several sources. The AI platform will be unable to provide the intended outcome if no information source is available. Google Search also emphasizes material from recently updated websites and does not typically provide results that are more than 5 or 10 years old.
Google is also quite adept at monetizing new platforms. It has done an excellent job of developing a profitable revenue stream from advertising on smart gadgets. In the AI era, Google has the resources and talented workforce to create efficient advertising solutions. The long-term impact of AI on Google Search is unlikely to be as severe as many observers predict.
Cloud Tailwind for Google
Google announced cloud revenue of $7.5 billion in the most recent quarter, up from $5.8 billion in the previous quarter. This corresponds to a 29% YoY growth rate, which is significantly greater than Amazon’s (NASDAQ:AMZN) AWS’s 16% growth rate. Google Cloud posted positive margins in the most recent quarter, increasing its operating income to $191 million from a year ago’s negative $700 million.
AI will be a significant boon to all cloud providers since it will push businesses to use cloud services in order to save money on the expensive expenses of implementing on-premises AI chips and tools. In a recent letter to shareholders, Amazon CEO Andy Jassy stated that more than 90% of IT spending is still done on-premises. This provides cloud providers with a long development runway to generate good CAGR growth in the next few years.
Even at a moderate 25% YoY growth rate, Google Cloud’s yearly revenue base should reach $150 billion by 2030. A 20% operating margin in this division would increase Google’s operating income by $30 billion. This segment, by itself, would enhance Google’s operational profits by 5% per year until 2030. As a result, AI growth represents a significant tailwind for Google Cloud and the entire company.
Subscription Growth
Google is also expanding its subscription service. It was a latecomer to the music streaming industry. However, it has added tens of millions of members in just a few quarters. Google stated in their most recent update that they had over 80 million customers as of September 2022. This is the highest YoY growth rate among the main music streaming players.
Apple Music’s stats haven’t been updated in a few years, which could signal a slowing in growth. Apple Music (NASDAQ:AAPL) and Amazon Music (NASDAQ:AMZN) both have close to 80 million members, according to third-party estimates. Google’s YouTube Music has likely surpassed both of these behemoths, and this may be reflected in Google’s next upgrade in a few months.
A recurring subscription income stream aids Google in developing a stronger moat around its services. TikTok also makes extensive use of AI techniques to deliver content. However, YouTube Shorts has gained substantial popularity in recent quarters. This demonstrates that the organization is not far behind the curve in terms of AI use.
Google Stock Is Reasonably Priced
Another significant advantage of Google is its lower value in comparison to other large technology companies. Google has the lowest forward PE among big tech companies following the recent bull run in the industry. This provides the stock with a longer growth runway and increases the firm’s long-term return potential.
Alphabet stock has a forward PE ratio of 22 and Apple’s ahead PE ratio of 31. Google’s YoY revenue growth rate was positive in the most recent quarter, compared to Apple’s negative 2.5%.
AI is unlikely to pose a danger to Google Search, and as the revenue proportion of non-search businesses grows, Wall Street may give Alphabet shares a higher price.
Bottom Line
Several analysts predict that the expansion of AI-based search tools will result in a major decrease in advertising revenue for Google Search. However, the company’s past record demonstrates that it has been highly adaptable in dealing with new platforms and technologies. AI also requires a large amount of updated information, which decreases the likelihood that the search would become obsolete.
The rise of AI in the cloud market should provide a big tailwind for Google Cloud. This segment could generate $150 billion in revenue by 2030, making it a crucial growth engine for the corporation. Google has also established a robust subscription business, which will provide the company with regular revenue. In comparison to other technology businesses, Google stock is selling at a low valuation. As a result, it is a superior choice for investors seeking long-term gains from a solid corporation.
Featured Image: Megapixl © Andreistanescu
