Google’s stock is one that has consistently outperformed since its foray into public markets dating back to 2004 [66x; 23.5% per annum]. It’s a touch point that people use everyday to help find answers and search for information about any topic imaginable. As part of the popularized Magnificent Seven (Mag 7), Google’s stock is by far the cheapest and its recent drop puts it at almost a historic low level of valuation. Considering the company’s balance sheet of zero debt, surplus cash, and capital-light qualities, using a simple forward price to earnings ratio is a quick and suitable way to assess its attractiveness. When very little new capital is required to boost sales and generate greater amounts of future free cash flow, you know you’re in the right type of business.
The reason for Google’s depressed share price can be attributed to two things: i) Anti-trust woes, ii) AI competition.
Let’s tackle the anti-trust issue first. I find this one to be the most nonsensical, and if anything should actually cause the company to trade at a premium - presenting a current discrepancy between price and value. For years, authoritative and regulatory bodies have argued that Google operates a monopoly by controlling both the search engine and web browsing platforms through its Chrome browser. Just recently, as of August 2024, the DOJ ruled that Google knowingly engaged in anticompetitive practices by paying billions of dollars to companies like Apple, Mozilla, and Samsung to make Google the default search engine on their devices and web browsers. This ensured a steady flow of search traffic for Google, and therein strengthened Google's dominance as the leading search engine. Based on the findings, the DOJ proposed a breakup of the company in which Google would divest its Chrome browser. The divesture could either involve selling Chrome or spinning it off as an independent company. They also alluded to further remedies relating to the divestiture of its Android operating system as well and possibly other business units (Youtube, Waymo, Cloud Business).
You don’t need to be the next venture capitalist to see that all several business arms are essential for daily operations which is further reflected by their natural high-margin characteristics (except Waymo - pretty sure it loses money right now). The point being, if Google is forced to break up or divest business units in some form, they would most likely trade on their own at a higher multiples. While Chrome browser is subject to threats from other generation ai platforms, a forward multiple of 25-30x wouldn’t be out of the question in today's market.
Moving to AI, the thought of Google no longer being the go-to search engine is under threat yet possibly overblown. Personally, I do find myself using sites like Perplexity.com more often but still rely on Google for nearly everything else (maps, email, images, drive, other searches). The concerns about AI drawing users away from Google isn’t fully unjustified but to imagine Google’s web browsing capabilities will no longer play a major role in this next generative ai revolution seems unlikely. And while Google’s own AI engine [Gemini] may be lagging behind competitors like ChatGPT and Perplexity, Google has the advantage of nearly $100 billion in annual net income to throw at these issues. It already spends billions upon billions on research and development annually, and despite early front runners gaining traction, I would not be ready to tag Google out in the early innings of this arms-race. A wild curveball especially for the DOJ, would be if Google made an aggressive bid for Perplexity before it goes public…it has a valuation of around $10 billion today. A drop in the bucket.
Getting caught up in all the AI hype and hoopla would not be my base case to readily cast Google aside like some discarded toy. It seems that all the risks that have been percolating from the anti-trust suites and threats from AI are now priced in at these levels. It would certainly be nice for all existing shareholders to receive shares in the new Chrome company if it were ever spun-off. A good risk-reward play.