Google: ChatGPT Is An Overstated Threat (NASDAQ:GOOG)

A hot new AI buzz has many investors scared of it Google (NASDAQ: GOOG, NASDAQ: GOOGL) is toast, but the market has forgotten that Alphabet now has a more diverse business. The stock remains remarkably cheap and falling under $100, with the potential to dramatically increase profits through an increase in efficiency. Me investment thesis remains ultra bullish on the stock with the deep valuation and limited threat from an AI chatbot.

No ChatGPT threat yet

Within days, a new AI chatbot from private OpenAI called ChatGPT reached more than 1 million users. The conversational chat service answers questions in natural language that some people think the interaction is with a human.

The service reached 1 million users at a record pace after it took all the big tech giants years, in some cases, to reach this user level. Of course, ChatGPT is an advancement of previously chatbots from OpenAI, so maybe the better companion is additional products like Instagram Reels or Twitter Spaces to the original websites.

Investors should also consider the recent success and collapse of Clubhouse. The live audio chat service quickly grew to over 1 million users and was just as quickly replicated into oblivion by Twitter Spaces.

One has to wonder if Google could do the same to ChatGPT by incorporating an AI chat feature into Google similar to how Twitter did with the audio chat product. The service has become more convenient to use within an existing social media platform with 100x the users versus an independent service like Clubhouse.

Either way, the AI ​​chatbot service has grown extremely fast. The service currently requires a login to use and the CEO has already admitted the computing costs are very high, requiring a fast path to monetization.

A service that requires a fee to use certainly won’t threaten Google search. The majority of consumers will continue to flock to Google for free search results.

Although many tech experts have claimed that ChatGPT is a threat to Google and offers highly technical examples, the service does not provide the links to other sites where Google is most used and highly monetized. As CNet points out, ChatGPT is efficient at answering complex questions and writing computer code, but the chatbot doesn’t always answer questions correctly. The AI ​​chatbot should not be relied upon for questions, while Google provides links to the most reliable website with the accurate information.

Most times, consumers looking for real goods and services are looking for the real original source of the information. Over time, OpenAI could build a service with the website links and citations or Google could add their own AI chatbot to replicate the service of ChatGPT. Remember, the Internet search king is already heavily involved in AI to obtain the most accurate search results.

Either way, anyone who bets against Google is betting against an organization with 180,000 employees focused on not losing the golden goose of Internet search. Not to mention, a comment from the OpenAI CEO about the high computing costs may question the feasibility of the product without charging a fee.

Promising shift from Google Search

Just last week, Google Cloud was announced as a joint winner of the $9 billion US Department of Defense cloud services deal. The agreement has been held for years and now has Google and Oracle (ORCL) joins Amazon (AMZN) AWS and Microsoft (MSFT) Azure as winners of the contract originally awarded to Microsoft, which caused Amazon to sue due to the feud between former President Trump and Amazon founder Jeff Bezos.

For Q3’22, Amazon still gets over 50% of revenue from Google Search. Other business units such as YouTube and Google Cloud have tremendous opportunity for growth in the years ahead.

Additionally, Google has units in the works such as Waymo in robotics that offer other growth opportunities outside of Internet search. In total, the tech giant is predicted to exceed $280 billion in revenue this year and a chatbot that doesn’t even replicate what Google is doing isn’t going to suddenly disrupt their business.

Both YouTube advertising and Google Cloud are nearly $30 billion businesses, even before incorporating Cloud business from the new DoD contract. However, Google Cloud is not profitable, so the Google Services business is the only profit driver. This business does include both YouTube divisions that offer optional outside search.

As highlighted in previous research, Google is cheap at just 13.5x non-GAAP EPS estimates of $7. If the company can become 20% more efficient, the tech giant has the potential to increase EPS to $10, and the stock now trades below $100 while having a cash balance of more than $100 billion.

Considering internet searches are more than 50% of the business and a much larger portion of the profits, the stock is definitely susceptible to any impact from the Google Search advertising business. The company is way too powerful to let a little AI chatter steal the golden goose of digital search advertising. Although, if that were to happen, Google would struggle to recover from these levels until YouTube, Google Cloud, or perhaps Waymo became big enough to drive the next wave of growth.

take away

The main takeaway for investors is that Google is priced out of the business of struggling because of a chatbot like ChatGPT. The chances of this chatbot affecting Google’s digital advertising business seem very low, but investors should keep a close eye on developments in the sector.

The stock remains an incredible bargain at ~9x the earnings potential of a more efficient business.