Summary
- Performance improvement: Performance improvement through restructuring and cloud profit margin improvement is expected to continue.
- Attractive value: The PER, which is below the S&P 500 average, is also attractive.
A significant rise in stock prices still depends on whether the company can ride the AI theme. There are points where Google and AI, represented by YouTube and search engines, appear to be in conflict.
- What is the synergy between AI and Google??
Investment point 1. Performance improvement
There were many concerns about a decrease in advertising spending due to AI, recession, etc., but Google still showed steady growth in advertising sales based on Google's search market share of over 91% and YouTube. In particular, YouTube's profit growth reached 15%.
Cloud's performance improvement was faster than that of YouTube. Google Cloud turned profitable from the first quarter of 2023 is growing faster than any other business, including Google's YouTube and Search. Of course, even as of the most recent quarter, it is only about 3-4% of profits and 11% of sales, but given the nature of the industry, which requires high initial investment costs, the fact that it has turned to growth is significant. Additionally, considering that demand for AI adoption is exploding across all industries, the growth rate may be faster than expected. In the performance announcement, it was also revealed that Google Cloud's strength is its AI solution.
(Reference: Google 2023Q4 Performance)
The harsh winds that are blowing at many IT companies are also blowing at Google. Sean Downey, Google's advertising director, announced that the advertising sales team would be reorganized late last year.
It did not directly mention layoffs. However, it is known that much of the advertising work will be replaced by AI, and it is predicted that about 30,000 people will be laid off. As a salaried employee myself, I do not particularly welcome restructuring by other companies, but it is true that it is aimed at improving profit indicators. Even in early 2023, Google has a precedent of laying off 12,000 employees.
Investment point 2. Attractive value
Value is also attractive. Among the Magnificemt 7, including Google, that are evaluated to have led the US market last year, it is at or slightly below the average PER of the S&P 500. Cash worth $90 billion is a bonus. Even Google is a company that invests very well. Just looking at Companies acquired by Google, it is not easy to refute this point.
Is the growth rate not enough? If you do that, that's not the case either. PEG, famous for the Peter Lynch index, is 1.33. Of course, Peter Lynch said to buy at 0.5 and sell at 1.5, but 1.33 is a very respectable number in a big tech stock that is in full swing.
It is rare to have an opportunity to purchase an IT company that is good at AI but also has growth potential comparable to Microsoft at a PER similar to that of S&P 500.
Meta, which rose the second most in Magnificent 7, was also an undervalued stock just a year and a half ago. Although it was profitable, SNS seemed like a past trend, and even though people were most enthusiastic about the metaverse, which was the hottest issue at the time, they were ridiculed. At the time, Meta's per was around 12-14.
Magnificent 7 increase rate (Source: Biz Chosun)
MNM stock price trend (Source: YahooFinance)
Investment point 3. Synergy between AI and Google?
Perhaps, the reflection of points 1 and 2 depends on this.
In the case of MNM (Microsoft, Nvidia, Meta), which is recently different from Magnificent 7 and is renewing its price, it is clearly compatible with AI. Microsoft's OS (Windows), Office + AI, Nvidia’s high-performance AI semiconductor + AI, Meta's Metaverse, Meta Quest Series + AI
Of course, the stock prices of those companies are not necessarily related only to the keywords above, but in any case, the keywords representing MNM are likely to make money by combining with AI or bring direct changes or new experiences to our lives.
However, the situation with Google and AI is slightly different.
This is an area where AI and Google do not seem to have any particular synergy. The generative AI that has been shown so far is exactly what we used through Google. “Finding a question and getting an answer, or getting pleasure from looking at content.” This is because someone is already using the functions of Google's main revenue sources, Search Engine and YouTube, in ChatGPT and its derivative services.
Everyone recognizes Google's potential in the AI field, but is it likely that its stake will be lost to ChatGPT or third-party generated AI in the future? Even if Google's Gemini eventually overcomes the ChatGPT camp, won't the search engine just be replaced by generative AI? In order for Google to join or overtake MNM, it appears that it will have to come up with a solution.
The company also seems to be focusing on this area. In the performance announcement, almost all fields were mentioned in relation to AI, and just by looking at Google's official blog, you can see AI-related articles in all categories.
Fortunately, so far, there is no evidence that Google's search engine is under threat. I don't know if the performance is as amazing as Google's announcement, but at least Google's Gemini doesn't seem to lag behind OpenAI's GPT-4. However, it seems clear that Google must prove synergy with AI in order to overcome the undervalued category.