Alphabet (GOOGL) Valuation Update: Analyzing the AI Threat to Search
A Three-Scenario Valuation Exploring the Future of Google
The sentiment on Alphabet has been swinging between fears the AI will end Google Search’s dominance and optimism that Goggle’s distribution and AI capabilities will allow it to weather the storm.
The recent I/O event served as a prime example of this volatility, with a hefty announcement of products shifting the narrative to an overwhelmingly positive stance almost overnight.
There is no doubt that Search’s dominance is threaten by AI. Even though this is not evident in Search revenue yet, such risk is real and whether it would be realized it is something to be seen. Given Alphabet’s significant weight in our portfolio, this analysis will assess Alphabet’s valuation under three scenarios for its Search business.
Before diving into the numbers, let’s take a look into some of the announcements of the I/O event and recent data on Search from the latest earning’s call to set the stage.
1. Recent Developments & Key Metrics
The Google I/O announcements highlighted the company’s commitment to capitalize on AI. Key announcements relevant to its AI and Search strategy included:
New Premium AI Tiers: The introduction of "Google AI Ultra," a premium subscription priced at $250 per month, significantly expands on the existing $20/month AI Premium tier. AI Ultra competes directly with ChatGPT Pro (offered at $200 a month). The subscription offers access to Google’s most advance AI capabilities like Imagen 4, Veo 3, Flow, agentic AI, has higher usage limits, and offers more storage (30TB Vs 2TB). Additionally, Google also bundled YouTube subscription to the Ultra tier, leveraging their distribution. Overall, this signals a clear intent to directly monetize advanced AI capabilities which we view as net positive as they increase revenue from subscriptions.
Expansion of AI in Search: AI Overviews were rolled out globally, and a new "AI Mode" within Search was introduced to handle more complex, nuanced queries. For AI Overviews, the Company mentioned before that monetization is at approximately the same rate as traditional Search. Additionally, there is 10% increase in usage of Google for the types of queries that show AI Overviews, which indicates user adoption. However, the monetization strategy for AI Mode is still unfolding, as Google needs to seamlessly integrate ads without negatively impacting the user experience.
Despite the long-term concerns surrounding Search, it has been steadily growing in the range of 10% over the last 7 quarters and management highlighted on a number of positives over the last earnings call.
Source: FinChat.io (affiliate link with a 15% discount for StockOpine readers)
Alphabet does not usually disclose Search volume but they did in the last earnings call, highlighting that there are more than 5 trillion searches on Google annually, with over 2 billion daily users. We didn’t find prior year information about the number of Searches disclosed by Google. However, this article from Search Engine Land estimated 2 trillion annual Searches per year in 2016. We expect that the Company will be disclosing the number more often, as it is important to provide more clarity regarding the performance of Search as it integrates AI capabilities.
On another positive note, AI Overviews is doing well with over 1.5 billion users per month (1 billion disclosed in October 2024). Additionally, volume of commercial queries which are highly monetizable has increased since the launch of AI overviews. The recent release of AI Mode further expands Search use cases as it is suitable for longer and more complex queries, with management disclosing early positive feedback.
On visual search, number of people shopping on Lens grew by over 10%, highlighting that the majority of Lens queries are incremental. Monthly visual searches with Lens have increased by 5 billion since October when they disclosed 20 billion searches. Circle to Search is now available on more than 250 million devices with usage increasing nearly 40% in the first quarter.
2. Competitive landscape and uncertainties
While the positive data points from the Company paint picture of successful early adoption of AI-enhanced Search features, the broader competitive landscape cannot be ignored. As we mentioned in our last report on the Company, the core-threat remains: AI-Powered Chatbots can gradually drive users away from traditional search ultimately impacting advertising revenue.
Additionally, it is also important to acknowledge the shifting dynamics in the digital advertising market where Amazon and Meta have been gaining market share in digital advertising over the last couple of years.
Source: FinChat.io (affiliate link with a 15% discount for StockOpine readers), StockOpine analysis
This trend, coupled with the existential questions posed by AI, should be taken with caution. As such, we have undertaken a three-scenario valuation focused on the future trajectory of Google's Search revenue to better assess the potential impact.
We believe this is a valuable exercise that provides investors with clear insight into where Google’s valuation could head and the potential impact of AI on its core business. Given the strong interest in Google among the investor community, we’re offering access to this premium analysis at 20% off for the next 24 hours. Don’t miss the opportunity to gain a deeper perspective.