Google Stock Is A Buy In 2023
The hype around ChatGPT, is providing a rare opportunity to purchase GOOG, a quality compounder, at a more than fair price.
The Big Slowdown
Since June 2022, a lot has happened. Mostly, the stock has gone down about 20%. This has been driven by both higher interest rates and a clearly slowing ad market. Organic growth has slowed from 32% y/y last Q4 to 1% y/y this Q4. Ouch! Now to be fair, a good chunk of this is currency (7% growth without it). But still, things have definitely slowed. It should be noted this slowdown is across online advertising. META (-4%), SNAP (0%), TWTR (some kind of disaster only Elon knows), PINS (4%) are all feeling that same pain. The only one bucking the trend is ByteDance’s Tik Tok (estimated 200% growth, thanks kids!).
However, this shift has driven a sense of urgency at GOOG for the first time in a long time. Activist investors like TCI are calling the company out for better cost control and they are listening. The company is focused on getting leaner and cutting costs with layoffs and office space reductions, something it has never done before.
I'm not sure how long the big slowdown will last, but my sense is that ads are a high single to low double digit CAGR grower over the next 5-7 years once we get 2023 out of the way. I don't see newspaper circulars making a comeback. I do see better targeted insertion of ads into online streaming as a nascant but big market opportunity.
Here Comes ChatGPT
Additionally, the rise of ChatGPT and Microsoft’s swift embrace of it and brilliant marketing bluster has driven near hysteria regarding GOOG’s search business. The founders have re-engaged. Now Google’s marketing department has made a bit of a snafu with the press highlighting an error that their ChatGPT competitor, Bard, made in the debut event. Want to know the funny thing? ChatGPT also makes errors all the time. The tech just isn’t that good yet. Sam Altman has said as much. It will improve fast, but it is not always going to be right. And honestly, as the product exists now there isn’t even a way to really provide feedback when it is wrong.
If AI is the future, GOOG is better positioned than anyone. GOOG’s history with AI is long and impressive. Here are a few of the highlights.
Jan 2014 Google acquires Deepmind for $500 million+. They’ve been onto this for a decade.
March 2016 - Deepmind’s Alpha Go beats Lee Sedol. There’s a good documentary on this here.
June 2016 - Google has already used Deepmind to reduce data center energy usage by 15% and save hundreds of millions of dollars.
October 2020 - Waymo launches fully self-driving Taxis in Arizona leveraging ML/AI.
July 2022 - Deepmind AI solves one of biology’s hardest problems, protein folding.
July 2022- Google employee claims their chatbot is sentient months before the release of ChatGPT. Obviously Google has already had a chat bot in place for a while.
AI features have already worked their way into numerous Google products from predictive search, to Gmail auto responses, to Google Translate.
What Google hasn’t done so far is release a science experiment that people can’t rely on which is basically what ChatGPT is according to Sam Altman.
I guess the sum of all this is that I understand Google to have lots of experience using, developing, and applying AI products. I also know that the best AI products tend to come from the best data sets and Google has more data about search, purchase intent, and location data than probably any company in the world. So in the end, I think Google is very well positioned to respond to threats from AI.
The real question is, do you think AI is going to destroy the search business? And, while I think it is hard to know for certain, in my estimation it is quite unlikely. AI is likely to become a feature incorporated into search and/or word processors and this tempest in a teapot is likely to pass by.
Antitrust Still Out There
Another concern for Google is antitrust. There are a host of cases going on around the world.
Google faces 5 antitrust cases in the U.S. and more globally including a new one filed in February over the digital ad marketplace.
Most of these cases are somewhat unconventional, since most of Google’s products are free to consumers it is hard to argue that they are harming consumers. But, the governments are arguing they have been anticompetitive from app stores, to the online advertising marketplace, to paying to be the default search engine. These cases will take years to resolve. Some of the trials are later this year but there will be appeals no matter who wins. The government’s only remedy is really to force Google to change its behavior, or break up the company. I for one would rejoice if Google were broken up because most major antitrust actions where the companies were broken up have created huge value for shareholders (see AT&T and Standard Oil) and I think a similar focus on each of Google’s individual businesses would drive more efficiency in the businesses. And even Microsoft’s antitrust case which they lost basically locked in the status quo for Microsoft for decades.
The bottom-line is I view antitrust as mostly an (unlikely) upside opportunity to force a breakup of the business. The fact that they are being sued as a monopoly tells you that this is a truly great business with a big moat that regulators feel can't be overcome without "help."
Conclusion
In the meantime, Google will keep improving search, gmail, maps, youtube, cloud services, deepmind, waymo, etc. In an AI-first world Google is a huge winner, the arms dealer enabling companies to apply AI weapons to their toughest problems from drug discovery to oil field optimization. The opportunity is much greater than the threat in my estimation. You can buy GOOG with a pristine balance sheet, new cost discipline, and an added sense of urgency for 17x 2023 EPS, a discount to the market multiple. That doesn’t seem bad to me. Maybe earnings go down if we get a recession, but 3-5 years from now I think you look back and see an opportunity to buy one of the world’s great businesses at a really fair price. Online ads are still taking share from print, radio, and TV and probably will be for several more years. The online ad market is lapping really tough comps from 2022, but seems to have plenty of growth ahead of it. Charlie and Warren screwed up once before not buying Google. I wonder if they will step up to the plate this time?