GOOGL Unique AI Positioning in Gemini, Cloud & Search Amid Competition Ramp

SPEAKER_1 (0:00)

Let's stay on the Mag 7, but go deep on Alphabet in our tech spotlight. John Belton, Portfolio Manager Gabelli Funds is joining me right now.

And let's talk about Alphabet and Google, all right? And I saw some positive comments from the analysts this morning, and how, you know, Cloud is doing and the margins. What's the big picture here?

John Belton (0:23)

Yeah, sure. So Google's a very uniquely positioned company. They have a core business that's clearly an AI beneficiary, a business that's seen dramatic re-acceleration in revenues since the start of this AI infrastructure build out. They're using AI to drive incremental queries and better ad targeting at search in YouTube. And then on top of that, they have a vertically integrated Cloud. They own, they have their own chips, they have their own model, and they have their own data centers.

So it's a uniquely positioned company that's kind of been benefiting from AI and on multiple areas of the business.

SPEAKER_1 (1:02)

We think about the value of the company and how it's broken down, what Google is working on, as you talked about it being an AI beneficiary. What are your thoughts, big picture, on the value where it is now? I mean, for example, one of the analysts today said the stock has 20% upside potential.

This is different than a lot of the tech names that are being hit today, right? In fact, it has an up arrow right now. What's the big picture on how the Google Cloud can still be a key part of the story going forward?

John Belton (1:37)

Right, Google Cloud, it's an interesting story right now. It's kind of become the fastest growing scale, hyperscale cloud platform. I think you had revenue growth accelerate into the 80 plus percent range last quarter. I think there's expectation that that accelerates again in the September quarter. Part of the driver here is they're starting to sell TPU chips externally. That's become an incremental source of revenue. It's small today. It's expected to start contributing even more next year.

But in addition to revenue growth, cloud margins have really expanded in this environment where all the hyperscale platforms are supply constrained, pricing has been very strong, and execution has been good at Google. So you've had this cloud business where revenues are accelerating, margins are expanding, and it's starting to differentiate itself as, again, a vertically integrated cloud platform.

SPEAKER_1 (2:37)

So search is holding up well. All those AI fears or did that come and go?

John Belton (2:47)

Search is holding up well for now. I think there are concerns that are sure to linger, but I think what's happened with search has been very interesting. If you've noticed, they've almost turned Google Search, my own interpretation, into a chatbot experience.

So they've rolled out a couple new products, this AI mode and AI search overviews. The short of it is, so far, what's happened is it's clearly driven incremental queries. So people are coming to Google Search, searching for something, and then the chatbot experience is driving more interaction, more engagement, more queries, and therefore more modernization. So this is a business, a few hundred billion dollars of annual revenue scale that's now growing, it's reaccelerated back into mid-teens growth. So it's actually taking share of total ad spend still, which is just an amazing story. So I still think Search is solid. I do think there are concerns that AI could, that different experiences, new experiences, AI native experiences could chip away at Search's business on the margins over the coming years.

SPEAKER_1 (4:02)

Yeah, and as we talk about the outlook for DeepMind and Gemini after the Argonne model launch, for example, we had BNP Paribot just talking about Google undercutting some of the rivals for the price as it's moving now to the enterprises and being somewhat positive. And they do have a 425 target, I'm sorry, a 420 target on Google which right now is at 349 But they did talk about Google undercutting some of the AI rivals on price, and that sounds like something that might be good. You talked a lot about margins. Is this where that fits in?

John Belton (4:40)

I think the strategy at DeepMind is much more focused on remaining at the frontier, remaining competitive with Anthropic, OpenAI, continuing to release really strong models at a good cadence.

I think they're less focused on monetizing Gemini today. I think they're much more focused on staying competitive with OpenAI and Anthropic, and I think they believe that owning the model layer is going to be a winning long-term strategy, that a lot of economics are going to accrue to the companies that own the models, and that long-term, there are only going to be a couple of companies that emerge at the frontier.