To The Moon

It is not often that I get to read articles from “The Economist” because it is a paid service. When I do, I always make time to relish their well thought out, well written articles. I thought I’ll share what I have read with my fellow Tigers. Enjoy! Once upon a time in Silicon Valley… and so it was on 30 Nov 2022 that OpenAI introduced the world to its product “ChatGPT” and threw an open invitation to everyone to try it out (see below). Like a deer caught in headlights, Google was shrouded in a fog of daze, caused by the emergence of ChatGPT, an artificially intelligent conversationalist created by OpenAI, a startup backed by $Microsoft(MSFT)$. ChatGPT gave uncannily humanlike answers to questions put to it by users. The effect created “panic” in the Google camp. Why? It is because answering questions is the “bread & butter” of Google’s lucrative search business. The New York Times (NYT) hit the nail on the head when they published the news article on 21 Dec 2022 (see above). Could this be NYT’s early Christmas present to $Alphabet(GOOG)$? LOL! Shortly after on 7 Feb 2023, Microsoft and OpenAI launched an enhanced version of its Bing search engine. Microsoft “accelerated” development pace led analysts to question whether Google’s lunch is about to be devour by someone hungrier? Eight months after the “birth” of ChatGPT, euphoria has dissipated and so has the “daze” hanging over Google. Thanks in part to Google reporting another set of solid quarterly results on 25 July 2023. Revenue: came in at $75 Billion. It is a +7% gain YoY. Operating profit: came in at $75 Billion in the 12 months to June 2023. Incidentally, Bing did not manage to take a discernible bite out of Google’s share of global monthly search queries, which remains >90%. And just like that, Google has put to rest any notion that it has fallen behind technologically. On 11 May 2023 at Google I/O event, CEO Sundar Pichai, unveiled more than a dozen AI-powered products (see below). Products included AI tools for (a) Gmail, (b) Google Maps and (c) Google Cloud. Redemption time? Like Microsoft, there was no let up by Google on the momentum gathered at Google I/O developers’ event. On 12 Jul, Google brought out NotebookLM, an AI-assisted note-taking tool trained on a user’s documents. On the same day, a Google research paper describing an AI model that matched human doctors’ responses to questions about the right treatment for patients was published in Nature, a scientific journal. On 13 Jul, Google expanded an improved version of Bard to the EU, It is proficient in > 40 human languages. Over 20 computer ones. Work on an AI model (codenamed Gemini,) to eclipse ChatGPT is proceeding as planned. Stocks price movements is in Percentage and not absolute amount. Above graph charts the price movements of Microsoft & Google from the time ChatGPT was officially launched until quarterly earnings report by the 2 Tech giants and Google’s I/O event. In recent days, Microsoft is trending downwards (click here! to find out why). And Google trending upwards. Google’s Crisis Over? Reply is an emphatic - “yes” and “no” simultaneously. In the immediate term - “yes”. Having nearly fallen below $1Trillion in November 2022, it has since “redeemed” itself (see below). Alphabet’s market value is hovering around $1.7 Trillion. Google bottomed in Nov 2022 and has since gained +8% In the longer term - “no” as the future of this tech giant is relatively “unknown”. With Google’s approaching 25th birthday in September 2023, there has never been a better time to look at where it is heading in terms of corporate life. View From The Top: Google is one of those rare, success story. Statistically, its 6 products boast >2 Billion users monthly - (1) Google search (2) Android mobile operating system (3) Chrome browser (4) Google Playstore (for apps), (5) Workspace productivity tools and (6) YouTube. Its other 2 products also boast hundreds of millions users monthly - (i) Google map and (ii) Google Translate. Collectively, users all over the world spend 22 Billion hours a day on Alphabet’s platforms. Google’s ability to keep audience engaged is why advertisers continue to want a slice of this. Since its IPO in 2004, 80% of revenue comes from online ads, growing at an average rate of 28%. Google has generated a total of $460 Billion; after operating expenses, from advertising alone. Share price has risen 50 folds, making Google the world's 4th most valuable company. With all the eye-popping achievements, it begs the question “Why Alphabet isn’t doing better?”. Google Facing Headwinds: Its core digital-ads business is maturing. Sales are no longer in double digits and increasingly tied to economic cycles. Finding new sources of material growth that could contribute significantly to a company with $300 Billions in annual revenue is a “huge” challenge.** Major shareholders & investors are increasingly calling for (a) greater cost efficiency and (b) capital discipline, requiring a major shake-up of Google’s free-wheeling corporate culture. Due to real estate constraints, will focus on headwind #2 that I feel poses the biggest challenge to Google. Google founders - Larry Page and Sergey Brin have the foresight to: Structure Alphabet into dual-class ownership. Creation of a holding company (Alphabet). House Google and other ventures under it. This includes “moonshots” from self-driving cars to life extending machines (see above). New Bets: Most of the moonshots look commercially questionable. Other Bets (subsumed under Alphabet) haemorrhages money. Between 2018 and 2022, these “potentials” added to a massive cumulative operating loss of $24 Billion. Losses is > 6 times bigger than Alphabet’s total revenues (see above). In fact, other bets have used part of Alphabet’s capital spending. Last year, it amounted to $31 Billion on top of the $40 Billion annual “Research-and-Development” budget. This comes about because of a deeper “problem” within Alphabet: Due to Alphabet’s massive top line, it will be difficult for any of its new ventures to move the needle. Only a handful of industries are large enough to make a material mark on Alphabet’s revenue. Namely - Finance, Government, Health care. Conquering these markets (a) require huge investments and (b) returns are not guaranteed. The concept of “heavy investment” is foreign to Google. With “Search advertising” Google’s profit generating engine is investment-light and a quasi-monopoly product. Samples of Google’s ventures. Google’s Health Care Ventures. Alphabet has two health subsidiaries. Calico for life extension. Verily for less ambitious medical goals. Investment for the past 6 years have amounted to around $15 Billion. So far, these ventures have little to show for it. Google’s Finance Ventures. Financially, Google offers the followings: A digital wallet that is very low profile. Invested in Lending Club, a peer-to-peer lender. Used to own price-comparison sites for insurance and mortgages, that it shut down in 2016. The above are Google’s half-baked effort that are “unambitious” when compared to its peer eg. Apple; that is already offering credit card and launched a buy-now-pay-later (BNPL) scheme. Veteran in the industry commented that Google’s efforts (above ventures) exist to service its ads business, to better to track users’ purchases, rather than a real attempt to become a serious financial player. Google Cloud. Alphabet’s biggest wager perhaps is to become a force in cloud-based, AI-boosted business software. Currently, ¾ of its capital spending goes on building and equipping new data centres. This is to catch up with Amazon Web Services (AWS) and Microsoft Azure, the two industry leaders. Google Cloud has in the past few years offered customers cut-price deals. Good news is that sales have been growing at an annual rate of 40%. This venture has been profitable in the past 2 quarters (albeit partly thanks to accounting changes). In a few years Google could become the world’s 2nd/3rd biggest provider of business software, says Google Cloud CEO, Thomas Kurian. His strong conviction stems from Google’s many years of experience working on its consumer business, ranging from voice recognition to AI-assisted search. This is the Google advantage. Also, he believes that “Enterprises will want to solve many of the same problems that consumers want to solve,” Enterprise business will be large enough to make a dent in Google’s revenue. Firms are projected to spend more than $4.7 Trillion this year on information technology (IT) - see below. Must be noted that IT is a cyclical business, and is intensely competitive. Even Microsoft almighty does not reveal its Azure results. $Amazon.com(AMZN)$ reveals that its operating margin has been falling, from -30% or more a few years ago to 24% today. Both Amazon and Microsoft are ranked #1 & #2 respectively as the biggest Cloud provider and formidable rivals. They have longstanding relationships with corporate clients. Google, by contrast, does not have a business-to-business bone in its body. My Viewpoint: If Google is serious about its cloud business, it has to engage its customers as closely as possible. Google cannot afford to rest on its laurels and continue to coast along year after year. The “sudden” development of artificial intelligence (AI) will disrupt the IT industry. Google along with the rest of FAANG & Microsoft will have to stay ahead of the curve, if it wants to remain “relevant” into the next decade. There is a saying “Knowledge is power” and this holds true for Google. Having amassed more customers data than any other IT companies; will Google be able to harness all this information to its advantage? There is also another saying, “Still water runs deeps”. Therefore, do not discount this tech giant yet. It may still have a few surprises up its sleeves. Do you think Alphabet is only a Google Search Engine? Do you think Alphabet will have a bright future in the mid to long term? Please give a “LIKe”, “Share” & “Re-post” ok. Thanks. Rating is very important (to me). Would you consider “Follow me” and get firsthand read of my daily new posts? Thanks! @Daily_Discussion @TigerPM @Tiger_SG @TigerStars @TigerEvents