I’ll keep this brief.
Assuming AI powered search becomes the new reality and every search provider has to follow Bing’s lead (incorporating Chat-GPT into Bing)….
….and assuming most people choose to run an AI powered search….
…Google’s average cost for powering search will go up…..
….assuming the cost of running AI-compute doesn’t reach parity with regular non-AI compute…
The Thesis
I don’t believe Google will become a less relevant search engine. As long as Google Chrome remains the market leader in browsers and Apple devices continue using Google search, people will continue using google search.
However, people’s expectations of what Search should be will shift.
If Bing can give customers accurate answers ala Chat-GPT, in order to maintain competitiveness, Google has to follow suit and offer a similar AI-powered experience.
Providing that experience isn’t cheap. Running GPUs are expensive and energy intensive. GPUs simply have a tonne more transistors switching at a higher frequency than CPUs. They consumer more power.
This additional cost = higher cost of goods for Google
This will reduce Google’s gross margin long term IF the big G doesn’t figure out how to power AI search cheaply.
What I’m Doing
I think Google today is fairly priced.
Enterprise Value : roughly 1.1T
Earnings : roughly $60b
Valuation : 18x earnings (TTM)
I think it is fairly priced because there’s little visibility to how slowly earnings will grow since there will likely be margin pressure + increased CAPEX from having to built out the infrastructure to power AI search. Facebook is doing this at the moment and it is costing them a total of $32b in 2023.
A lot of that $32b is going towards infrastructure and some to Reality Labs.
Now, we can obviously consider this as a large one-time expense, but it doesn’t change the fact that Google is likely going to have to spend a whole lot more in the near term.
In this macro environment, the stock probably will decline, and justifiably so. More capex and lower margins? Google is worth less. Exactly how much less - hard to know.
I’m happy waiting to buy more Google since I have purchased 50% of my intended allocation.
Note : I am not a financial advisor and this is my personal portfolio. Do not blindly follow and do your due diligence. You can lose money by investing in the stock market. All my writing is opinion and NOT advice.
I have been wrong on some firms. Peloton for example didn’t grow as intended and management tore through the balance sheet with little discipline. This is par for the course in investing. You win some, you lose some. Had you blindly followed my work on Peloton, you’d have lost over 80% of your capital. Proceed with caution.