Google's Earnings Impress, but AI Competition Looms

Google Stock Is The Stalwart Of Big Tech (Rating Upgrade) (NASDAQ:GOOGL)

I last covered Google (NASDAQ:GOOGL) (GOOG) in June; I issued a hold rating at the time on overvaluation concerns. After a 7% decline in price since then, I am upgrading my rating to a Buy again. Google is one of my favorite investments and companies of all time-in my opinion, its structure, management, and valuation make for one of the most stable and least volatile big tech investments on the market. Despite this, the risks of AI usurping Google Search are mounting, in my opinion, and to date, I do not think Gemini, Google's commercial AI offering, has enough utility to offer enough growth prospects, even though it does offer resistance against competition. After reviewing the Q2 earnings call transcript, there are several areas that caught my attention about how management is dealing with the current changing AI landscape. First of all, Google has introduced visual search, including Google Lens, Circle to Search, and Multisearch tools. These are likely to help Google fend off chatbots like OpenAI and, even more commonly now, capabilities within Meta's (META) family of apps. This visual search technology is revolutionizing the search industry because users are now able to find products using images, which leads to higher conversion rates. This brings me to why grounding with Google Search is so important for the company's AI capabilities; it also helps it to establish somewhat more of a nuanced moat than other tech companies offering chatbots, as many of these chatbots use Google as a third-party to crawl data, but Gemini and Google AI have proprietary access to the code and full database. Furthermore, it is already well-known that Google is integrating ads into its AI-generated search answers, known as AI Overviews. However, management has now strategically decided to integrate ads into its AI Overviews, which are relevant to the query and the information in the AI Overview. This is a monetization tool that other chatbot providers do not have, who rely on subscriptions-it arguably protects Google quite a lot from the monetary drawbacks of rising AI competitors. More broadly, Google's Tensor Processing Units and the recently announced Axiom processor, as well as its AI-optimized data centers, represent a full-stack approach to AI. While Google's frontier AI models are not open-source (but arguably could and should be to aid in leadership and iteration efficiency), TensorFlow, its machine learning framework, is open-source. Furthermore, Google has developed Vertex AI, which is a machine-learning platform that simplifies the full development of AI models. In my opinion, these developments, which are only a few of its many, are helping Google to stay competitive in the AI arms race with an infrastructure that can only be matched by other big tech firms like Amazon (AMZN) and Meta. In my last analysis of Google, I outlined that the stock had likely become moderately overvalued after the significant undervaluation in 2022. The result of my analysis at that time was a price CAGR of roughly 15.5% over the next 10 years in a bull-case outcome. I also mentioned that there were short-term downside risks related to the overvaluation at the time; now, I estimate that these have largely already come to pass. As a result, my price CAGR forecasts for Google have now increased. Google is one of the largest investments I have, and I am proud of this fact despite the fact that it may lack the same ruthless competitive advantages that companies like Amazon and Tesla (TSLA) have. Google has famously gained a reputation as somewhere where it's hard to get fired, but it's also got the reputation of hiring the brightest, most elite talent in its field. As a result of Google's financial and organizational strategy, which I believe is centered on developing a stalwart nature (slow and steady rather than fast and volatile), the stock is incredibly attractively valued due to its lower growth prospects than some other big tech firms. This valuation is incredibly attractive to me, and it has demonstrated much more stability as a result of this low valuation for big tech. This is made evident by the lower volatility in its price compared to Amazon and Tesla. I have actually come to the conclusion after studying countless companies that the stock price chart is an accurate reflection of the values that companies hold. Radical growth at the expense of stability can be seen in the TSLA price history, high growth but higher volatility can be seen in AMZN, and moderate growth and moderate volatility can be seen in GOOGL. In other words, Google is less aggressive operationally, and as a result, investing in it at a fair valuation is much more appealing than investing in Amazon and Tesla, which are better to invest in when undervalued, in my opinion, to remove downside volatility risk. My new estimated 5Y price CAGR for GOOGL is based on a 5Y EPS annual growth forecast of 18% and a PE ratio estimate for the company of 25 in 5 years' time. The result of these forecasts is a basic EPS of $16 in August 2025 and a stock price of $400. This indicates a 5Y price CAGR of approximately 19% from the present stock price of $170. The fact that Google is closed-source for frontier models means that it restricts access to external developers. Despite it having an open-source machine learning framework, which provides development access to third-parties, this is a revenue generator rather than a model iteration benefit. Google would arguably need to release its frontier models as open-source to engender the level of competition necessary to give it a sincere competitive advantage in AI over the long term. In my opinion, Google does need this, as while Gemini is strong on benchmarks, anybody who uses these models regularly can tell you that Gemini currently has limited utility in professional settings. ChatGPT-4o has much broader and more significant usability. Alphabet can change this by open-sourcing Gemini's frontier iterations because Google is not solely reliant on Gemini for revenue. Also, Gemini has a strong reputation being attached to Google, so even if new developers offer a model by using Google's open-source (or, as Meta does it, open-weight, calling it open-source), it would likely not have the same traction as Gemini. The point here is that in the AI arms race, it is not revenue from AI models that matters; it is the power of the AI, which will be the moats that have the largest capital utility in the long term. I think Google needs to consider that it is, in fact, behind on AI commercial utility despite its currently formidable position in the field. I think Meta is significantly undervalued in the AI race right now, despite the now growing common sentiment that it is likely to be an AI leader. In my recent analysis of Meta, I ascertained that it was conceivable that Meta would become the first to develop AGI as a result of its open-source, or open-weight, approach to frontier AI. This creates some uncertainty for Google; however, despite the competition, I agree with Zuckerberg that multipolar AGI is how the future of AI will look, with multiple players developing independent AGIs. The concern is that Google may not be one of the first to achieve this, and this could have financial repercussions, especially if clients begin to favor in-app searches on Meta's apps. It is undoubtable that the nature of search is changing, but Sundar Pichai and Google's board are very well aware of this. That is why the company shifted to an AI-first strategy, and it is certainly working hard to retain its moat in search. In my opinion, however, more still needs to be done. But as Pichai has stated many times, Google does not dance to other people's music-it works at its own pace. Therefore, it is conceivable that while companies like Meta have a short-term win, Google wins the AI war. After the recent pullback in price, Google is definitely a Buy based on my analysis. I consider the company to be the stalwart of big tech; it is one of the largest holdings in my portfolio, and I believe it is likely that over a long time horizon of 10+ years, Google will start to be perceived as the leader in accessible AI, despite the conceivable reality that OpenAI and Meta develop AGI first. Whatever the future of multipolar AGI looks like, Google will certainly be one of the major players, and I think it is the company's reputation and values that will remain incredibly attractive to users once its commercial AI models and more useful for professional use cases.

Google - Will Google lose market share to Meta and Microsoft (OpenAI)? | Investing.com UK

According to a forecast by the market research company Gartner, Google (NASDAQ:GOOGL) will have to hand over about a quarter of its search volume to AI chatbots and 'answer machines' by 2026. In addition to start-ups such as You.com and Perplexity, large companies such as Meta and OpenAI are also entering this billion-dollar market. More and more providers are positioning themselves between Google and its users by using generative AI. The German start-up You.com made the first move at the end of 2022, followed by Perplexity last year. Meta recently launched its AI assistant based on the new flagship model Llama 3, which answers user questions directly. And now OpenAI is entering the market with SearchGPT. It was clear that Microsoft (NASDAQ:MSFT) would not miss out on this market. After all, Microsoft has already invested billions in OpenAI and is treading water with its own browser. We are not yet able to judge how You.com and Perplexity will develop, or whether they will perhaps be bought by a large company, but it is certain that with OpenAI/Microsoft and Meta, two major players are entering the scene that could take market share away from Google. The idea behind it is simple: these new providers interpret users' search queries, search for relevant content on websites and use AI to generate an answer that can be displayed as text, graphics or images. This means that users can get the information they want faster without having to click on links, while also benefiting from advances in AI technology. They can choose the best model for the answer and, in the next step, even use AI agents to book a restaurant or order a book, for example. The shift of search queries to AI chat models A significant step in this direction is Meta's introduction of an AI search slot that will be integrated into Facebook (NASDAQ:META), Instagram and WhatsApp, reaching more than three billion people. OpenAI is also developing a chatbot that reads information from websites in real time and converts it into answers. Sam Altman, CEO of OpenAI, has hinted that it is not just about creating a better version of Google Search, but potentially a whole new way of finding, using and summarising information. You.com founder Richard Socher expects a large proportion of global search queries to be shifted to such chat models. This development could have a significant impact on Google's business if there are enough competitors in the market. The search for the best business model The business model for these new AI services is still unclear. Using expensive AI for simple answers does not seem to be worthwhile, especially since no direct revenues are generated through advertising. Socher expects two models to prevail: a paid premium version and a free version that may later integrate advertising. However, this advertising would have to be designed in such a way that it does not distort the AI answers. Google is also considering charging for AI answers while maintaining the traditional advertising model. Socher remains realistic and does not believe that Google will lose its importance overnight. Even if a company captures only a small share of the search engine market, it can still become a billion-dollar company. Socher sees the real business potential in offering companies the use of AI response engines. Companies could use these services to increase their efficiency. Perplexity is also pursuing a similar strategy, offering a new version for companies to make their employees more productive. Google's response to the change: 'Search Generative Experience' Google has already responded to the change and last year introduced the 'Search Generative Experience', in which AI responses are placed via organic links. However, this new search function has not yet been fully rolled out. Google is facing an 'innovator's dilemma': the company currently earns $500 million a day from search engine advertising and therefore has little incentive to change its business model. Nevertheless, Google needs to show that it is evolving in order to stay competitive. Interestingly, Google even supplies Meta AI with real-time information, which surprised Mark Zuckerberg. Google provides this information in exchange for prominent placement in Meta's AI responses to generate traffic. This agreement is said to be mutually beneficial. Google stock shows clear weakness Will it soon be back on its feet, or do we have to prepare for a major price correction? We will now answer this question. Google continues to follow our forecast exactly. The price has entered the red box at the top of the chart, between $185.81 and $201.48, and has been on a downward trajectory ever since. We communicated this target a few months ago on our YouTube channel and to our members (you can access our website via the link next to my profile picture above this text). We are sticking to our forecast that the share price will have to fall significantly. We can very well imagine that the stock is currently in a recovery phase that could easily extend to the red box at $175.48 to $184.54. This is an ideal area to initiate a downward trend reversal. However, we must be aware that a recovery phase could also extend to $203.41 (please see the beige arrow in the chart). A corrective wave (B) would have room to run up to that point. Anything below this price level is likely to be part of the correction. Only when the stock manages to break through this level will our alternative, which we describe below, come into effect. If we compare Google with other technology stocks from the Nasdaq and with the Nasdaq itself, it is most likely that the stock will fall to the purple box between $137.33 and $106.45. This is where we plan to buy. The alternative is not a reason to rejoice. If the stock manages to extend the recovery phase significantly upwards and even break through the $203.41 level, we would expect to see a very pronounced high in the area of the red circle at $215.54 to $230.75. And while this would be good news at first, because the share price would continue to rise sharply, a devastatingly strong correction would then be expected. You can find more details on our website. Challenges for publishers, established brands and online shops The shift from search queries to AI chatbots could have a significant impact on many business models on the internet. According to estimates, traditional search engines will lose about 25 per cent of their search volume to AI chatbots and virtual agents by 2026. Companies therefore need to adapt their marketing strategies as generative AI is increasingly being integrated into all aspects of business. Publishers, online shops and platforms such as Amazon (NASDAQ:AMZN), which receive a large proportion of their visitors via Google, also need to adapt to these changes. They are working on being present in the AI machines in order to maintain their traffic. One option is to provide AI with its own content or to develop its own AI search engines. It will also become more difficult for search engines to assess the quality of content, as AI-generated texts and images will appear alongside original content. Google has announced that it will not devalue AI content across the board, which could further intensify the competition for the best positions. Initial analyses show that many search hits that would normally appear in the top 10 of organic search results were not considered by the AI responses. This could make it necessary for well-known brands and websites that have previously been prominently represented on Google to adjust their marketing strategy. You can find out more about us on our website, which you can access via the link next to my profile picture above this text. Disclaimer/Risk warning: The information provided here is for informational purposes only and does not constitute a recommendation to buy or sell. It should not be understood as an explicit or implicit assurance of a particular price development of the financial instruments mentioned or as a call to action. The purchase of securities involves risks that may lead to the total loss of the capital invested. The information provided does not replace expert investment advice tailored to individual needs. No liability or guarantee is assumed, either explicitly or implicitly, for the timeliness, accuracy, appropriateness or completeness of the information provided, nor for any financial losses. These are expressly not financial analyses, but journalistic texts. Readers who make investment decisions or carry out transactions based on the information provided here do so entirely at their own risk. The authors may hold securities of the companies/securities/shares discussed at the time of publication and therefore a conflict of interest may exist.