Google stock has been challenged since the launch of OpenAI’s phenomenal chatbot product ChatGPT. Moreover, after Microsoft’s announcement of investment of 10 billion in OpenAI, they are also going to integrate ChatGPT into their New Bing search engine (getting there before Google). Following that, Google also released their ChatGPT alternatives AI demo, which is a disaster showing the product is not ready yet, Google stock price dropped 12% after the event.
(Source: Chartr)
Why ChatGPT brings threat to Google?
The essence of search engine is Information retrieval, crawling the web and pull data from a static data set, and creating an index of it. As there are tons of information nowadays comparing with 25 years ago when Google was just founded, the problem of this information is there are too much search results for end users. Probably a million search result came out from a random search, and the problem nowadays is users don’t have time to read all. As an alternative, Chatbot gives limited answer or answers to users, seems more efficient ways to display information (a specific answer rather than a list). As users become more lazy to search (human nature), Chatbot maybe a new way to acquire information.
Another advantage of ChatGPT over Google is it has context. Since ChatGPT is a Chatbot which purpose is to continue the conversation as long as possible, through the conversation with the user, the Chatbot will understand better about user’s questions and thus would give more relevant answers.
Bullish points of Google Stock:
1. Facing the external threat from ChatGPT, Google still has its business moat. From human-computer interaction perspective, sometimes users are looking for different formats of data rather than a specific answer. For example, if I want to buy a flight ticket from New York to LA, I would like to see a matrix of results display to compare — flight schedule, length and price, rather than one specific answer. For another user scenario, if I was searching for a products, I would like to know pros and cons of the product, rather than one-side answer.
2. The second bullish point if Google’s strong business model makes it generate so much cash that it could accomplish any project if they are willing to put resources into it. Google makes $3 per click, about 3% click-through-rate on ads (5 cents per search on average). The cost per search is 2.5 cents on average, so the profit margin of search is around 50%. On the other hand, ChatGPT cost 30 cents per computing result, which is much higher cost than Google’s search engine model. From business cost perspective, For Google they need $8–20 billion a quarter just to run search results and display them, so for ChatGPT, they would need $80 billion to run from a cost perspective. Google’s strong business model and cash generating power of ~$100 Billion EBITDA per year would definitely has better advantage than OpenAI for now.
3. Also as one of the best tech companies in the world, Google’s AI technology probably could also enable it catch up in the AI war. Since bought DeepMind in 2014, Google has used AI for internal solution, improved data center efficiency by 40%, improved ad recommendations and YouTube watch hours and revenue, enabled auto-fill in Gmail and doc and many other usage scenarios.
Bearish points of Google:
1. Revenue source too concentrated on search (from paid ads), around 90%. If in the future, Chatbot become the mains stream method people retrieve information, Google’s traffic volume would be much less. That means advertisers would pay less for search ads and Google’s profitability would be largely affected.
(Source: visualcapitalist.com)
2. As Google’s core business is based on the search engine, the disruption of rising Chatbot may affect the traffic of search engine. There are some limitations of search engine, like it could not understand context, if users search a specific query and put too detailed keywords in the search engine, it would not be searchable. In this scenario, Chatbot could be able to understand detailed meaning through the conversation of the user and then able to give better solutions.
As for valuation, currently Morningstar analyst gives fair value of $154, and the current price $95 shows $GOOGL stock is undervalued at 39% discount. The safer entry point would be below $92.4. Although Google’s search main business is disrupted by the new AI Chatbot, given its wide economic moat and exemplary capital allocation, I think it would be a good timing to buy the dip with appropriate capital allocation based on individual investors’ risk tolerance.
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