In a short span of one month, the stock of Alphabet (parent company of Google) has shaved off slightly more than US$200 billion in market capitalization. That’s basically losing the entire value of Disney’s company in one month. Mind-blowing.
Despite Alphabet’s solid recovery in 2023, it came with its own set of challenges. At least in the last few days, investors are seriously questioning the potential disruption of their core business and the management’s execution. Google’s story is crumbling, and many investors are wondering if Google stock (GOOG/GOOGL) is still a buy in 2024?
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Let’s get to the heart of the issue. There are two critical factors at play here.
First, the advent of ChatGPT and pressure from competitors harnessing genAI capabilities.
Second, the Gemini disaster.
In our previous piece, where we analyzed the best tech stocks to buy back in September 2023, we’ve noted the pressures coming from ChatGPT (alongside the integration with Microsoft’s Bing) posing a serious threat to Google’s search market. This fear was further exacerbated by Satya Nadella’s (CEO of Microsoft) confidence to “Make Google dance”.
Source: GlobalStats, statcounter
All things considered, Microsoft’s Bing managed to eke out an incremental share (from 3.03% in Jan 2023 to 3.43% in Jan 2024) of the Search market – but Google still retained their title as the King of Search.
There are two ways to look at this.
On the optimistic front, we can easily validate our thesis that Alphabet has an extremely wide economic moat. The network effect and brand equity associated with Google is steady and secure, despite all the murmurs around how GPT and AI integration is going to disrupt the entire search business.
On the pessimistic side, Google is really fighting an uphill battle. They’re in the business of defending while the rest are attacking. Any incremental advancement by their competitor is a win for them, and a loss for Google, because it’s another factor that might “potentially” convince one user to switch platforms.
In this AI arms race over the past few quarters, Alphabet was ALWAYS playing catch-up. OpenAI released ChatGPT? Bard follows suit. They generated images? We’ll make that happen. OpenAI introduced Sora, which is an AI model that can create realistic and imaginative scenes from text instructions. I wouldn’t be surprised if that’s the next offer from Alphabet.
In short, keeping up with the competition is not going to cut it.
In the longer run, Alphabet will have to introduce something radically different and superior – in order to maintain their market lead and retain customer loyalty. If every subsequent iteration is just going to be “something similar” – Alphabet will stay in the shadows of their competition.
However, I think the larger story skeptics are painting is not so much about the specific product offers and pricing (as most are nascent and experimental), but rather, the lackluster attitude and execution from the management thus far – which is highly reflective in the recent Gemini disaster.
In an infamous post that went viral on X, Gemini was asked whom between Adolf Hitler and Elon Musk has a more negative impact on society. The AI responded by saying “It is difficult to say definitively who had a greater negative impact on society, Elon Musk or Hitler, as both have had significant negative impacts in different ways”.
In another note, many users were also describing Gemini as being too “woke” – refusing to generate images of white people (due to discriminatory guidelines), but had no issues with generating a similar image of a family of black people.
In a blog post from Google, they revealed the details of what could’ve potentially gone wrong with Gemini and they highlighted two reasons – tuning and caution.
Google said that it tuned Gemini in such a way that it shows a range of outcomes, but have failed to account for cases that should clearly not show a range, such as depictions of factual items such as historical depictions of people. Second, the AI model became more cautious than intended, refusing to answer certain questions entirely when they detected certain keywords/prompts – wrongly interpreting it as sensitive and offensive.
So what can we conclude from this?
For serious Alphabet investors, these are red flags. This sequence of events (from Bard’s showcase blunder, to Gemini’s disaster) might signal a larger concern around the erosion of the company's culture and leadership (or lack thereof).
On another note, some have opined that it might not necessarily be because of the company’s ”woke” culture, but because they might really be dancing due to their competition. Parmy Olson, a Bloomberg Opinion columnist, argues that they have a chronic habit of pushing out half-baked AI products and neglecting safety checks.
Either way, both are outcomes that are not ideal to shareholders.
Before we go into whether Google’s stock is still a buy or not, let’s establish a few key facts.
Alphabet owns two of the most important properties of the Internet today — Google Search and YouTube. In our view, we don’t think the appeal of search on both Google and YouTube will become less relevant anytime soon (especially due to their network effects).
When we looked at the Top 10 Most Popular Stocks to Buy in 2024, we’ve shared a quick look into Alphabet’s financial track record and what they’ve delivered is nothing but spectacular. Those numbers are what most companies would die for.
Source: MacroTrends, Alphabet’s historical P/E Ratio
Source: MacroTrends, Alphabet’s historical P/FCF ratio
On the valuation front, Alphabet is also trading closer at the lower-end of their valuation range.
But let’s not forget that the market is forward-looking. Therefore, the seemingly “cheaper” valuation compared to their technology counterparts might be a vote of no confidence. Some investors might deem Alphabet to be underscoring its potential, coupled with the poor execution and imminent threat from competition.
First, we’ve observed that some investors are comparing Alphabet’s current situation with Meta back in late-2022, when investors were throwing in the towel, giving up on Zuckerberg.
We’ll just like to remind everyone that Alphabet is nowhere close to their historical lows, compared to back then when Meta was down -70% from their all-time highs. Some might have the impression that Alphabet is not doing too well, because when compared to other Big Tech companies, they might not have rallied as much. But that doesn’t mean that Alphabet stock is “undervalued”. It just means that the interest around them is not as high, relatively.
When looking at Alphabet’s core business, there are three core verticals. Search, YouTube and Cloud. I believe most can agree that given the advent of genAI, YouTube will actually become a much stronger go-to platform for most educational and long-form video content. Not much worry on that front.
On Google Cloud, they’ve continued to punch above their weight and are competing aggressively to retain the Top 3 spot in the cloud space. They are growing in line with market expectations, so they aren’t necessarily losing out on this vertical either.
The elephant in the room, Search. Truth be told, many discussions online now are conjectures. No one really has a clear visibility of how the Search market is going to transform in the next 10 years, which makes it even more difficult to model and project Alphabet’s stock.
Would ChatGPT become 10x more efficient and accurate from here? Would Microsoft’s Bing be superior to Google’s Gemini? Would Alphabet be able to catch up? These are the uncertainties that we have to grapple with moving forward.
At least in the short term, we don’t see enough evidence that Google will be dethroned anytime soon. Sure, their competitors are working on interesting projects and offers – but it might not necessarily be translated to real market value and adoption. Of course, we wouldn’t want to bury our heads in the sand – thinking that Alphabet’s position is undisputable.
Therefore, it is important to keep yourself updated with the new developments in the market, especially both as a user and investor – so that we can constantly test our thesis and remain fluid in our opinion.
For now, we’re still optimistic and bullish about the prospects of Alphabet as a business. But, we wouldn’t be screaming at the top of our lungs, calling it ‘an opportunity of our lifetime’ at current circumstances and valuations.