summary
(1) Google is taking major steps in the field of artificial intelligence, launching Google Bard, a generative AI chatbot, and investing $300 million in artificial intelligence startup Anthropic.
(2) Google's investment in AI startup Anthropic is a counterattack to OpenAI's ChatGPT. The launch of AI assistant on Google Cloud could drive Google's growth in AI.
(3) The market size of generative AI solutions is expected to grow from $10 billion in 2022 to more than $118 billion in the next decade, providing Google with huge growth opportunities.
(4) Compared to Microsoft, Google's potential in artificial intelligence is underestimated because its P/E ratio is only 20 times, while Microsoft's P/E ratio is 30 times.
Google has integrated AI into its search business
Google (G00G) is still seen as the world's leading internet advertising giant, and there are some very good data to back this up. Google (GOOGL) had revenue of $69.8 billion in the first quarter, 78% of which came from advertising. The advertising business relies heavily on Google's ability to place relevant products and services next to Google search results and on YouTube. While Google's fastest-growing business is cloud computing, Beast Finance believes Google's core advertising business could accelerate again thanks to the integration of AI technology.
Going forward, AI will make it easier for people to find products and services, which will provide Google with a huge opportunity to boost its advertising business and leverage its main competitive advantage relative to Microsoft (MSFT): scale.
Google's main advantage is that the company is far ahead of Microsoft in terms of search engine market share. So far, Google is already the most dominant search engine on the planet with a market share of 89%, while Microsoft is a close second with a market share of just 6%.
Apparently Microsoft has realized the potential of ChatGPT in its search business, so earlier this year it invested $10 billion in OpenAI, the creator of ChatGPT. Microsoft also recently said it would integrate the Bing search engine with ChatGPT to grab the search market. In addition, Microsoft is incorporating ChatGPT functionality into its Microsoft 365 app and says its AI assistant will be available on Windows 11.
Google is following Microsoft's lead by integrating generative AI into its search results, which could lead to a more immersive search and shopping experience for users and higher conversion rates for advertisers on Google's platform. However, Google's opportunity in AI will not only be to integrate AI technology into the search business, but also into productivity tools such as Google Cloud and Google Docs. Given that Google still dominates the global search market, the market may be too pessimistic about Google's position in the AI race.
Google Cloud's strengths in generative AI
Google recently announced a partnership with Twilio (TWLO) to increase user engagement with Twilio. Google has also partnered with cloud database company DataStax to improve customer service. By offering generative AI assistants to enterprise customers, Beast Finance believes Google's cloud business may be able to accelerate growth again... Google Cloud's growth has slowed in recent quarters as businesses have reduced spending on IT. But by partnering with these partners, Google is opening up new sources of growth for its cloud business, especially in the enterprise customer service market. Google is currently the world's third-largest provider of public cloud infrastructure services in terms of market share, behind Amazon's (AMZN) AWS and Microsoft's Azure.
The market size of generative AI solutions will explode over the next decade
According to Precedence Research, the market size of generative AI solutions will grow from $10.8 billion in 2022 to $118.1 billion by 2032. Over the next decade, the generative AI market is expected to grow 11-fold, i.e. an average annual growth rate of 27%.
Clearly, Google has a huge opportunity in this market with its own AI products, including Google Bard, an AI chatbot released in March, after ChatGPT swept the global AI market. While Google hasn't made the same major investment in AI as Microsoft has with OpenAI, the company recently invested $300 million in AI startup Anthropic, which is developing a ChatGPT competitor called Claude, which focuses not only on AI research, but also on the development and deployment of AI in security.
One use case for Anthropic's AI assistant is a potential integration with Google's cloud business, which could help the tech company tap into the enterprise customer service market. Anthropic's generative AI assistant has been tested on Slack, a work chat app. Slack is an app owned by customer relationship management company Salesforce.
Since the use of AI is currently unregulated, it is possible that Google will develop a framework for comprehensive regulation of AI, which will focus primarily on the responsible use of AI applications.
Google CEO Sundar Pichai recently warned about the dangers of AI, and the focus on AI safety could be a distinguishing feature of Google's future growth and help the company stand out from the competition.
Google's potential in artificial intelligence relative to Microsoft is grossly underestimated
Google's two main strengths are that its search platform continues to dominate the market, and its advertising business continues to generate significant free cash flow. Google's digital advertising business generates the majority of the company's revenue and gives Google leverage to apply AI integration in its business. Given that Google is by far the most dominant search engine, Beast Finance believes the valuation gap between Microsoft and Google will work in favor of the latter.
Google currently trades at 19.6x earnings and 25.9x P/FCF. That makes Google a better deal than Microsoft. There's also no evidence that Microsoft will grow faster than Google in the near future. According to the consensus forecast, Google's EPS growth rate is expected to reach 17-18% in fiscal 2025, while Microsoft's EPS annual growth rate for the same period is expected to be 4-14%.
The risks to Google
Google is still very dependent on advertising, with 78% of its revenue coming from its core advertising services. While the downturn in the digital advertising market is a risk factor for Google, the bigger risk is whether the company misses out on the AI revolution. The AI revolution promises unprecedented productivity gains for businesses.
Another risk factor is that AI has proven to be so powerful that humans can't handle it, limiting the potential for AI applications. Palantir CEO Alexander Karp recently hinted at that possibility. If Google's market share starts to be eaten away by Microsoft's Bing Search thanks to ChatGPT, and if the use of AI assistants fails to drive the growth of Google's cloud business, then our perception of Google could change.
conclusion
Microsoft's investment in OpenAI was a huge success, raising its investment to $10 billion and managing to make Bing Search the default search engine for ChatGPT. However, Google has two advantages over Microsoft:
(1) Google's search engine is still the primary way users get information;
(2) Google's massive free cash flow has allowed the company to aggressively expand its AI tools and invest in (or acquire) AI-focused startups like Anthropic.
As a result, Google has a huge advantage in its core advertising business, as AI-powered applications can further improve the accuracy of search results, and the addition of generative AI products can also improve Google's online shopping experience (and conversion rates).
Considering that Google's valuation is more attractive than Microsoft's, with a P/E ratio of only 20 times, while Microsoft's P/E ratio is close to 30 times, Beast Finance believes that Google still has great potential in the field of artificial intelligence based on the already very profitable advertising business.
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