Earlier this month, we published an article that outlined why we believed Alphabet Inc. (NASDAQ:GOOG, NASDAQ:GOOGL)--henceforth referred to as Google--had remained largely silent as the other giants of the tech landscape broadcasted plans to conduct large-scale layoffs and overhaul the general cost structures of their business.
In the article, we said that we believed Google was laying low due to the finalization of CEO Sundar Pichai's three-year pay package. We predicted that the company would soon announce layoffs and begin to work on new strategic initiatives that would excite investors who had turned a little sour on the company, believing it to have become much like the dinosaur tech companies it disrupted long ago.
While we can't with certainty say we were correct in our reasoning, our timing was good. Google announced a large round of layoffs barely a week ago. Of course, we don't want to ghoulishly revel in this, but unfortunately we believe it will serve the company well in the long term.
In the meantime, two new threats have arisen for Google that are worth investigating: the rise of public awareness around ChatGPT, and a new anti-trust lawsuit brought by the U.S. government. In short, we think that investors should not fret about either of these in the medium term.
First off, let's address the elephant in the room. ChatGPT is good. Like, scary good. It is a revolutionary step in AI that causes college professors around the country to tremble with fear. It's tough to pin down when exactly ChatGPT became the new fascination of the public, but we'd say early December of 2022. Ever since then, the internet has been ablaze with doom and gloom articles predicting that the end of Google's reign as the dominant search engine on the planet is neigh.
Now, let's all take a collective breath.
First, ChatGPT and Google search do two different things. ChatGPT can have something resembling conversations with users, it can recall facts and information, and it can even pen essays on topics. All of this is, of course incredible. But what folks--and investors--should keep in mind is that ChatGPT is not a search engine. In fact, it doesn't search the Internet at all. The responses that it generates instead rely on its training and programming. As a result, the answers it gives are limited. It cannot discuss current events, and the facts that it gives you could be misleading or completely incorrect.
Second, the sort of things that you might use ChatGPT for are different than the things you would use Google search for. You can't use ChatGPT for directions on how to get somewhere. On the other hand, if you want to have an AI bot write a marketing post for you, you can't use Google search. If you want to translate posts from one language into one you can understand, well, you can use either service for that.
Google, for its part, is also not sitting on its hands. In a widely-circulated panic piece published in late December 2022 in the New York Times, it was reported that Sundar Pichai had, effectively, broken the emergency glass behind which Larry Page and Sergey Brin now live so that they might come back and rescue the company.
This is a little ridiculous, in our view. It also shows us just how far Google has fallen the public's general esteem if they are willing to believe that Google's leadership essentially behaves like Scrooge McDuck, swimming in vaults of money, unaware of the disrupting threats right around the corner.
In fact, Google has been working on three separate AI iterations for some time. Dubbed LaMDA, MUM, and PaLM, these AI projects each perform slightly different functions which, if or when brought together, would create a powerful force to rival ChatGPT. Add in the fact that whatever AI bot Google rolls out will likely have integration with Google search, and you have yourself a ChatGPT killer.
Perhaps the most troubling aspect of this is that ChatGPT has attracted the attention--and money--of Google's rival Microsoft (MSFT), whose Bing search is decent, but far behind Google search in terms of usage.
However, this is where we believe gravity will pull ChatGPT back down to Earth: aside from something like a subscription service, it's really, really difficult to see how ChatGPT makes any, you know, money.
What would a ChatGPT revenue stream even look like? A written advertisement? A click-box along the side of the page a-la Google search and Bing? To be honest, it's a little difficult to conceive of how ChatGPT--a bot intended to have conversations and used widely to compose marketing posts for influencers and college essays for broke students--could create a revenue stream to rival traditional search at this point.
A subject much more worthy of pearl-clutching and hand-wringing, in our view, is the suit filed by the U.S. Department of Justice yesterday seeking to break up Google's ad business. This is not the first time the DOJ has brought suit against Google.
This also isn't surprising: the Biden administration has aimed explicitly at reviving the breaking up of monopolistic enterprises, an area where government efforts have floundered over the last few decades.
Furthermore, it can be plainly stated that Google is, in fact, a monopoly.
And yet, current law makes it incredibly difficult for the government to successfully sue a monopolistic enterprise today. While the government has tried different tacks in the past and, of course, won its suit against Microsoft, it has had very little success overall against pure software and Big Tech companies.
Further complicating matters, Google is be what might be described as a popular monopoly, or a democratized monopoly. Unlike, say, Standard Oil, or even Microsoft, Google's popularity is largely owed to the fact that it's, well, better than everything else.
For example, consumers did not have a choice in regard to Standard Oil's rise to power--the conglomeration of John Rockefeller's enterprise around the country was the product of buyouts and ruthless corporate competition that took place far outside the view of the average American. Even in Microsoft's case, consumers generally didn't choose to utilize Windows--the rise of its software was fueled by enterprise deals with computer manufacturers that essentially made use of its Windows operating system unavoidable.
On the other hand, people use Google search--we use Google search--simply because the ability of its algorithm is unmatched.
While the government may have a point in that Google's 30% take off the top from ad spends is excessive, few around the world would likely be happy if their Google search experience was less robust.
We also point out that the government's aim does not seem to be the complete destruction of Google, but the elimination of what it considers to be predatory advertisement sales practices by the divestiture of its ad business. If this were to happen, the likely result would be a new public company which shareholders of Google would then own a stake. Even this wouldn't be a necessarily terrible outcome.
However, the end result of this lawsuit could take many forms--the government could win outright, Google could win outright, or a deal could be struck (the most likely outcome in our view). We also point out that litigation of this type can drag on for years, and while Big Tech in general has run afoul of both sides of the political aisle so that now even the prospect of a new Republican administration may not spell relief for Google, we also think that the scope and nature of the suit could change.
In short--the announcement of a lawsuit is, in a way, just that. An announcement. An opening round in what's sure to be a long, protracted contest, and should not necessarily be a great worry for investors today.
We maintain our thesis that Google is off to a solid start in 2023. The company still trades at a historic price-to-value disconnect, and investors should, in our view, consider it strongly for their portfolio. In addition to the points raised in our last article (which you can read here), we have laid out our case that:
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Disclosure: I/we have a beneficial long position in the shares of GOOGL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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