Google’s search growth raises questions about AI competition

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 6:44

   To Google. So Google revenue was up 25%. Cloud revenue was up 103% is what I have here. The stock immediately tanks. What are investors reacting to? It's not the cloud business. Cloud business is doing great. To your point, doubling. Again, doubling to $120 billion is a lot. Part of it is TPU sales now. A lot of it is the momentum them in Anthropic, talked about Anthropic decelerating, but still added a lot of revenue.

2. 7:17

   And a lot of that goes in referral fees and compute fees to Google Cloud. So that part of the business was great. If that's all they reported, the stock would be up. It's the other part. It's that core advertising business. We have long been worried that that business would be negatively impacted by AI. And it is Google search that was the big weakness. If people stop Googling and start GPT-ing, that means less ad sales.

3. 7:48

   And they've been able to assuage those concerns for the last couple of years and keep nice growth rates within Google search. But this quarter, it appeared to abruptly slow down. They're talking about having tough comps, but that's an abrupt slowdown that nobody expected. And now investors are going to ask themselves, is it happening? Is the shift to AI now mean that the most lucrative business Google has ever been in, which is selling search ads, is that business going to be impacted?

4. 8:20

   That's why you're seeing that big step down in the stock is that that's the core cash generator. If that's suffering, and by the way, it's not the ad market that's the problem. Meta accelerated growth to the high twins last week. Meta is now growing more than twice as fast in the digital advertising business than Google. They're gaining a lot of share. The concern seems to be specifically about what Google is doing in search advertising.

5. 8:48

   Do you believe that that is what is happening? Do you believe that, and to be clear, it's not that the search revenue is falling, but the growth is slowing down. And part of me thinks, well, this is a gigantic business to begin with. a slowdown in growth, I'm not necessarily that surprised by. But do you think that it is genuinely a reflection? of people are not using the product as much because they're using other products.

6. 9:19

   They're using ChatGPT, they're using Claude. They're using all of these things that everyone was so afraid would eat Google's lunch at some point. It's too early to tell, right? One quarter. Okay. I don't think investors need to panic about it. It's just, this was the raw nerve that got exposed when ChatGPT came out. When ChatGPT came out, we all jumped to the conclusion that this is going to happen.

7. 9:41

   And it didn't happen for the subsequent three years. That's why we're very on edge about the possibility of this change in behavior impacting their advertising business. But you're right. They're still growing. It's one quarter. Don't need to panic. But it is something that is very much top of mind. Because, again, that's where a vast majority of the profit comes from, from Google. That is the engine.

8. 10:06

   That is where they had overwhelming share. Remember, we all used to Google. 90% plus share in the search market, in the chat market, there are two.