The theme of Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) I/O conference was AI. The technologies presented will improve almost every source of revenue Google has, and it put Google in a strategic place to start new sources of revenue.
AI will be the most significant technological disruption since the internet, and Google is leading the way. The progress shown at the conference was nothing short of spectacular, and it provided hints of Google's plan to dominate AI.
The conference Implications
Google Duplex was the big reveal of the conference. The demo displayed the Google assistant making calls to book a restaurant and a hair appointment with human-like precision.
The obvious application for this technology is the improvement of Google's Assistant, but Duplex could also be used to grab the Telemarketing and Telephone Switchboard Business and call centers. A natural path toward this goal would be to incorporate Duplex into the telephone food ordering service, as Google is already working with them. Starbucks (SBUX), Domino's (DPZ), Applebees (DIN), Seven Eleven, Doordash, Just Eat, Panera, Dunkin' Donuts (DNKN), with more brands to follow.
Source: Google IO 2018 Conference
During the conference, Google showed how it is integrating pick-up and delivery features to Android. Extending its partnership to incorporate phone orders would save foodchains on labor cost, and could represent a new and significant source of revenue for Google.
The call center industry brings close to $200 billion a year, and it is expected to double by 2022. This number doesn't account for new businesses that currently use their staff to handle calls or food delivery services. Many call centers and telemarketing companies have a high rotation of personnel and depend on flow charts to guide their employees.
Transforming these flowcharts into a code for Duplex should be relatively straightforward. The majority of the cost associated with this business is labor cost, and Google's will be close to zero. That competitive advantage would allow them to lower prices and grab a significant share of the market. Banks and other institutions that handle sensitive information might also want to adopt these systems.
Source: Author's charts
Subtracting the cash from Google's Market Cap, we have a more accurate reference to Market cap: Revenue ratio. Assuming a minimum market share of 25% and only 20% chances of success, Duplex alone could be worth over a hundred billion.
Leaving aside the size of the revenue Duplex could provide, it will help Google to bring more customers to its environment. It could open the door for G Suite to grab a more significant piece of the market, and increase Android's strength in wearables and other devices.
Google Lens
Google Lens' improvement between the October presentation and today is astounding. The conference illustrated how Lens could answer queries that are difficult to put in words, like "What breed of dog is that?" and actions that are very useful, like transforming an image into a document or copying text from a picture.
Source: Google IO 2018 Conference
This feature will be a significant edge against Apple (AAPL), but also it will create an advantage against Microsoft (MSFT) Cloud or Dropbox (DBX). Google photos will make it easier for users to search for pictures and use information from there. The service will be substantially more appealing than its competitors. Even iPhone users might choose to back-up their photos on Google to take advantage of Lens. As you can read in this article, the cloud business has a high-profit margin.
Source: Google IO 2018 Conference
Another feature of Lens is Style Match, that displays information similar to the one it has scanned. One example given at the conference was that the camera could scan an outfit, identify the parts of it, and display the information of the specific item, as well as similar items. The demo showed the pieces of Wayfair (W), Walmart (WMT), Target (TGT), Zeckos, Macy's (M), Belk, Dillard's (DDS) and Gap (GPS).
Source: Google IO 2018 Conference
Amazon (AMZN) has not yet conquered the clothing market, but many retailers are feeling the heat of its presence. Every retailer would find in Google a much-needed partner to establish a stronger online presence. Amazon's edge is the ease with which customers can find and order items on the internet. Google Lens could be a threat to Amazon, and a great ally for retailers. Many retailers will not survive the shift to online shopping, but the ones who do will need Google to stay afloat.
Google Lens is the type of improvement we have come to expect; it is an improvement on the performance of Google sources of revenue. Lens will secure Google's growth for its core business.
Waymo
After the conference, UBS analyst Eric Sheridan estimated that Waymo could be worth anywhere from $25 billion to $135 billion. The company is far ahead of its competitors. Google's AI is a valuable moat that will help Google take at least a good part of the self-driving revolution.
Source: Google IO 2018 Conference
Google Assistant is already in 40 car brands. All these brands are likely to have a self-driving model shortly. Very few car manufacturers are developing proprietary Self-driving technology, like Tesla (TSLA), and are likely to partner with Google to improve its lineup.
When looking at the graph above, it is clear that Google has an edge in the Autonomous vehicle business. Waymo could take over companies like Uber (UBER) in a heartbeat. Google has little to no debt, more than 100 Billion in cash and several car manufacturers as partners. Waymo has all it needs to dominate the car-hailing industry worldwide.
Valuation
Many of Google's past innovations have aimed to improve Google's service or increase its reach. It invested in Android so that people kept searching with Google, and to improve the user experience in mobile devices. We can separate the technologies presented in the conference into these two categories. Google Lens, is decidedly an enhancement to Google's product; Waymo is a separate source of revenue and a new business, and Duplex, which is both.
Source: Reuters
Google is trading at a P/E near 35, within the range of the industry and the average P/E it has been trading for the past five years. However, other bets like Waymo, Verily, and Duplex will increase the growth of Google beyond the expected growth of its core business.
The market seems to be giving little value to Google's other bets, the I/O conference gave a minuscule increase in the stock price compared to the technological progress.
Source: Reuters
Even if the market was pricing in Waymo and allocated some innovation expectations to the valuation, the progress shown was far more significant than what was expected.
Conclusions
Google's IO conference makes a compelling argument to be bullish on Google. Its AI developments are starting to deliver significant fruits, and the expansion Google is building will allow it to diversify to a vast number of new endeavors without increasing the complexity of its operations in the same magnitude.
A past article explored Google's ambitions for the Healthcare industry, which also was mentioned in the conference. From Healthcare to text recognition, Google is exploring all avenues of AI. Developing AI structures required an enormous amount of data. Google's edge is that it has spent the last decade gathering data from the more than 3 billion people with access to the internet. Its core business is information, and no other company has the access Google has. Even companies like Facebook (FB) have limited data in comparison. Facebook "only" has little over 2 Billion users, and the app gathers far less information than Google's products do.
Google is a behemoth with no sign of slowing down, and AI will make them soar to new heights.
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