Invite ye felawes and frendes desirous in gold to enter the gates of Shrewd'm, for they will thanke ye later.
- Manlobbi
Personal Finance Topics / Retirement Investing
No. of Recommendations: 4
I have outlined the Bull case, but I have to admit I am stuck trying to figure out the Bear case.
Are these realistic threats?
* Investing $75B in capex won't pay off (its really only 1 year of free cash flow)
* ChatGPT will kill their search business (even if this is true, it might take what 5 years or more?)
* Recession will kill growth in their Cloud business (possibly a short term speed bump)
* ???
tecmo
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No. of Recommendations: 12
The fundamental bear case is that the Company's competitive moat has diminished significantly. This will lead to ongoing declines in revenues/profits -- as the days of 20%+ growth in revenues are behind us. Depending on how you look at the company, somewhere between 50% and 80% of revenues/profits are linked to search/ads -- and if one goes, they'll both go.
While Google has an "ecosystem" (and imo, chrome/gmail/youtube are very sticky), that ecosystem can rapidly diminish once alternatives are presented. I remember how quickly we all dropped Yahoo! search when Google was deemed better (or Yahoo! email when gmail offered more storage). The LLMs have already digested the internet so the war will be over "interpretation of old" or "access to new" -- competitors have significantly reduced costs (Deepseek) and real time new info (X, Meta). Google's deal with reddit fails (for example).
Further, there is an argument that Google has become highly politicized internally and this will be a complex subject that plays out negatively for the company.
The combination of these factors could support a longer term flatline in revenue, decrease in profit (as costs increase and management throws capex in an effort to defend the moat against competition) and we'd see a flat to negative stock return.
I'm still trying to decide if I'm a buyer here fyi -- I'm getting flash backs to BABA.
No. of Recommendations: 3
The fundamental bear case is that the Company's competitive moat has diminished significantly. This will lead to ongoing declines in revenues/profits -- as the days of 20%+ growth in revenues are behind us. Depending on how you look at the company, somewhere between 50% and 80% of revenues/profits are linked to search/ads -- and if one goes, they'll both go.
OK, however even assuming a modest 5% growth rate in revenues would still make the stock attractive at current levels.
FYI: Growth rates (Revenue) have been above 20% in quite some time.
Google is a cash cow and it will take some time to erode their position in the market. Things are different from 15 years ago when Yahoo messed up their position (IMO).
tecmo
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BTW: Search was 76% of revenues over the past year.
No. of Recommendations: 5
If the search moat is truly disappearing, such as by non-Gemini LLMs taking up a greater share of searches that would have previously been keyword searches, and in an ad-enhancing way, there's no reason to think 5% revenue growth is a conservative assumption. Search-related revenues may very well decline, as a better service becomes available. The "mind share" ChatGPT now occupies at least provides the seed for the threat to materialize.
The company has some protection against this by its very broad user base (Youtube, Gmail, Android, Maps, etc.) and its introduction of Gemini throughout most of these products (I agree its unlike Yahoo here), but both revenues and profits can decline. Why not? Buyers will very quickly flock to a better advertiser if that happens.
Alphabet is my biggest position, but the above is a real risk to me. And it requires smart capital allocation to solve it.
No. of Recommendations: 5
This is extremely well said -- I've been on the fence for a very long time as a result although I'm feeling very tempted.
My "not downside" downside is that at 19x earnings (5.2% earnings yield) + 1-2% growth, I think a sleepy return of 6-7% is achievable. This certainly feels better than 4% in money markets at a much more tax advantaged rate. I can't help but wonder if Buffett felt similarly about Apple during his purchases. Limited innovation but a sticky user base with some reasonable (albeit limited) pricing power.
Of course, a "downside downside" would represent a reversion to 2022/2023 levels of financials and a 30% to 50% drop in market cap due to the downward spiral of multiple compression and earnings drops. Of course, if I can't stomach that possibility, I deserve the 4% in money markets.
Hah!
No. of Recommendations: 2
Interesting, thanks for the feedback. The moat issue is probably a blind spot for me since I am such an active Google user (both at work and at home) and don't see ChatGPT as a viable substitute.
tecmo
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No. of Recommendations: 2
...as am I. But just for fun—next time you go to look something up (“Google it”)—try using Grok or ChatGPT. I usually run three or four windows side by side and let them duke it out like a lunatic. Hah.
Now imagine LLMs improving to the point where they suggest multiple sources, summarize across them, generate video answers... Even if that’s just as good as Gemini, it starts to erode Google’s edge. Now picture X or ChatGPT bundling search with payments, social, news—and offering a dead-simple email port. Yikes… or not yikes? It’s a great thought experiment.
Apple’s moat, for example, has one or two key walls—iMessage being a big one. I can’t imagine breaking my message history. But if iMessage ported to Android, Apple’s pricing power (at least for someone like me) would drop instantly.
I’d argue there’s a real chance—maybe 10–30%—that if you pull the Search/Ads rug out from under Alphabet, the rest could unravel quickly (or at least shrink drastically).
That said, I think today’s valuation reflects that risk reasonably well.
No. of Recommendations: 1
How does a tariff induced deep recession impact advertising revenues and revenue growth at YouTube? How does any tariff retaliation by our partners impact Google? We’ve seen the impact on Apple already? If we’re entering an age of autarky I wonder how that impacts Google, Meta and such.
No. of Recommendations: 1
How does a tariff induced deep recession impact advertising revenues and revenue growth at YouTube? How does any tariff retaliation by our partners impact Google? We’ve seen the impact on Apple already? If we’re entering an age of autarky I wonder how that impacts Google, Meta and such.
I don't think there is really any difference between a "tariff induced deep recession" and a normal "deep recession". Clearly it will impact Google's customer base and would be a head-wind for many of their products. With Apple they import a lot of their goods so they will face margin pressure as well as drop in demand which would be a bigger impact than on Google.
tecmo
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No. of Recommendations: 5
They may be vulnerable to any tariff retaliation from Europe. US has a huge services trade surplus with EU, which almost wipes out the goods trade deficit. Tariffs and taxes on services may be an effective way for EU to retaliate.
US administration only talks about goods trade deficits, not total trade balances including services. I wonder why.
No. of Recommendations: 1
