Who doesn’t know Google? Most of us use the term ‘googling’ to refer to ‘searching online.’ Yeah, that’s how popular Google is. However, Google’s stock price has not done too well recently. Google underperformed its ‘Magnificent 7’ peers.
Google’s Revenue Sources
Google just reported its Q3 2024 earnings result, which was great as usual. Revenue increased by 15% YoY, and EPS increased by 37% YoY.
Here we break down Google’s primary revenue sources (in millions):
| Q3 2023 | Q3 2024 | Change YoY% | |
|---|---|---|---|
| Google Search | $44,026 | $49,385 | +12.2% |
| Google Network | $7,669 | $7,548 | -1.6% |
| Google Subscription | $8,339 | $10,656 | +27.8% |
| Youtube | $7,952 | $8,921 | +12.2% |
| Google Cloud | $8,411 | $11,353 | +35% |
Most of them grew at a very healthy double-digit year over year. This is a sign of a healthy and growing business. And if we convert those revenue numbers as a percentage of total revenue, here is the breakdown:
We can see that Google Search is still the primary revenue source for Google, accounting for 56% of its total revenue. Despite their strong growth, the other revenue sources will still take some time before getting a bigger slice of the pie.
With such a concentration of revenue sources, you can probably guess why Google’s stock price has not been doing too well recently. Yes, Google’s search dominance is potentially under threat.
Is Google Search Losing Its Magic?
During the early days when Google launched its search engine, most users were ‘wow’-ed by how good the search results were back then. It was like magic, and you could get the answer quickly. Unsurprisingly, Google rose quickly to capture most of the world’s online search market.
Even today, Google still controls most of the online search market:
Search Results Quality Issues?
But here comes the ‘not-so-good’ news: many people have complained about Google’s search results today. Here, we discuss some that we have personally noticed recently.
Superfluous and Similar Articles as Top Results
One of the fundamental issues with the search results today is the superfluous articles that Google tends to promote because of Google’s inherent ranking algorithm, which tends to promote those kinds of articles.
Many publishers try to ‘game’ Google’s algorithm by reverse-engineering how its ranking algorithm works. This ‘game’ is called SEO (Search Engine Optimization), which is a thriving industry by itself.
As a result, we often see long-form, superfluous articles that try to discuss everything related to a topic being ranked high in the search results. The top few results tend to be similar.
If you are looking for a quick answer, this could be an inefficient way to find that answer.
Google has been trying to address this issue by updating its algorithm regularly. Still, the SEO community seems to be able to continue playing this SEO game of ‘chicken-and-mouse’ with Google.
Favoring Large Publishers
Additionally, Google search results also seem to favor large publishers, which may cause a distorted view of specific topics due to the strong influence of these few large publishers.
With the latest Google’s core algorithm update this year, we have seen that smaller publishers are less likely to be promoted, even if the site has much more accurate data or answers.
Too Many Ads
This needs no explanation: Google’s search result pages have too many ads—way too many for an enjoyable user experience.
We understand that Google is under pressure to increase its search revenue consistently every quarter, and adding more ads is one of the easiest ways to achieve this goal. However, there is a point where displaying more ads will cause user experience to decline.
We would love to hear what you think about Google’s search results nowadays and if you have noticed some quality issues in recent years.
Disruption from AI-Powered Search Engines
You can probably get away with less-than-ideal quality when you are dominant because there are no competitors. Google has been in this position for decades. However, the rise of AI may threaten this dominance.
OpenAI has recently released SearchGPT, a direct competitor of Google Search. It is an AI-powered search engine that tends to give more precise results quicker. Other competitors include PerplexityAI, which has also developed an AI-powered search engine.
Google has tried to fence this competition by integrating Gemini into its search results. You may get an AI-generated answer at the top of the search result page when Gemini can deliver the answer to your search query.
That said, Google’s release of Gemini has not been smooth. It was full of hiccups, and Google gave the impression that it was behind in this AI race against its competitors. Falling behind competitors is never ideal, especially when it’s likely that AI will significantly shape the future of search.
Network Effect
While Google Search faces challenges, we believe the company’s well-established network effect remains a significant competitive advantage.
Most of us use more Google products than just Search, for example, the Google Chrome browser, Android, Gmail, Google Drive, Google Maps, etc. This ecosystem of apps allows Google to keep its Search relevant by making it the default search engine and collecting user data and behavior throughout the use of these products.
We think Google’s strong network effect may have helped the company stay dominant by fencing competitors away for now. This network effect will provide a window of opportunity for Google to enhance its AI offerings, helping ensure that its Search product remains relevant and competitive in the rapidly evolving AI landscape.
Ultimately, a company’s ability to innovate and react to competition will determine its survivability. In the past, we have seen some dominant companies, such as Yahoo! or MySpace, collapsing even with such a ‘perceived’ wide moat at the time.
Google Is Being Sued by the DOJ
To make things worse, the US Department of Justice (DOJ) has accused Google of monopolistic practices in the online search and digital advertising markets. US regulators proposed an aggressive measure to level the playing field by attempting to break up Google.
In particular, the regulators proposed that Google sell off its Google Chrome browser. The browser allows Google to collect user data, benefiting its search and ad products. Because Google Chrome is one of the most popular browsers in the world, Google Search immediately has access to a broad user base by being the default search engine in Chrome, thus cementing its online search dominance.
Other proposals include banning Google from paying Apple or Mozilla to set Google Search as the default search engine on their platforms, stopping Google from favoring its services in its search results, such as YouTube and Gemini, and divesting Android should other measures fail to level the online search playing field.
Google’s management has argued that the regulators’ proposals are wildly overbroad and would harm consumers. Google will most likely fight this case for years to come.
What Do We Think of DOJ’s Proposal?
Although we understand the intention, the DOJ’s proposals seem’ overreaching.’ The proposal to divest Google Chrome may not be ideal for consumers and the industry.
Let’s assume the Chrome divestment proceeds. Who will own this Chrome browser? We don’t think other competing tech companies, such as Microsoft, Meta, OpenAI, etc., should be eligible, as that could lead to another monopolistic practice.
As a side note, please also remember that Chrome doesn’t really make money because its value comes from the user behavioral data it can collect and its ability to keep the search dominant through its default search engine.
Potential suitors of Google Chrome will likely need to monetize the browser if they cannot benefit from its underlying value (which synergizes very well with Google businesses). Overly monetizing the browser could potentially cause Chrome’s user experience to suffer, affecting the overall consumer experience.
What Do We Do?
We think Google may be facing an existential threat from multiple fronts, namely the AI revolution and the DOJ’s proposal. Let’s address each one individually.
We believe the AI threat is a real existential threat to which Google should pay attention with the utmost urgency. As AI advances, future online searches may differ from today’s. Investors may be concerned that Google appears to be still playing ‘catch-up’ to its competitors, as this could indicate potential disruption to its core business.
However, with such a strong moat, we believe Google will have some time to position itself to remain dominant in the online search market. We are pleased to see that Gemini has been deployed to Google Search, and based on our daily usage so far, the results have been decent.
For the DOJ’s lawsuit: If the DOJ’s proposal to break up Google, especially its Chrome browser, proceeds, it will have a detrimental impact on Google’s fundamentals. That said, we don’t think it is in the consumer’s best interest for that to happen, as Google Chrome is one of consumers’ favorite browsers, and Google has done a great job keeping it as a lightweight and fast browser that we all enjoy.
Instead, we think the DOJ should consider other proposals that will benefit all industry players and, more importantly, the consumers.
We will continue to monitor the progress going forward, as this process may take many years before negotiations and resolutions can be completed.
Google’s Valuation
Due to the overhang from the potential issues above, Google has been trading below its other ‘Magnificient 7’ peers.
Google’s P/E ratio as of 22 November 2024 is 21.85, the Nasdaq 100 index has a P/E ratio of 33.15, and the S&P500 index has a P/E ratio of 24.72. The market seems to discount Google’s businesses by pricing it with a lower P/E ratio than the broad market indexes such as Nasdaq 100 and S&P500.
Despite its lower valuation, investors planning to invest in Google must understand the company’s potential issues and be comfortable with those potential risk factors.
We already have a position in Google and will continue to hold it for the long term because we still believe Google can remain the industry leader in the online search and digital ads market.
What do you think? Are you interested in investing in Google?
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