The Existential Issues Facing Alphabet (GOOG)
Why I would never buy Google stock despite it having been my #1 long 5 years ago
I was recently asked my thoughts regarding the MAG7. Since the seven tech stocks that comprise this informal index are highly correlated, it’s understandable to think of them as a monolith. But my opinions about these stocks vary widely. I’m bullish on Apple and Microsoft, bearish on Nvidia, Meta, and Tesla, and neutral on Amazon. But the only one I would absolutely never touch is Alphabet. This post will explain why.
Google’s Existential Crisis
The main issue facing Alphabet, in my mind, is the existential issue facing Google Search. About 60% of the company’s revenue comes from Google Search advertising. The business model is simple: have a best-in-class search engine, and charge companies to place ads on each search. It’s been in place since the late 1990s and is a cash cow for the company.
The problem? AI. It’s hard to think of any company whose business is more threatened by AI than Google. Chatbots can now do everything a search engine can and more: instead of showing you a bunch of websites, it can summarize the information they contain so that you never have to visit them at all. This is bad news for the websites, but it’s also bad news for Google.
Since the release of ChatGPT, Google was forced to add an “AI overview” into its search results in order to remain relevant. This is an amazing feature. The only problem is that it doesn’t bring in any revenue. Google could add advertising into these results easily, but the fact that they haven’t yet indicates some problem with the strategy.
YouTube’s Existential Crisis
From a product that was the epitome of cool for many years after its launch in 2005, YouTube now sits in the same uncomfortable niche Facebook does: it’s still very popular in general, but it’s totally lost the younger generations. From a video site that was very open and free, YouTube has transformed into one that is driven by profits instead of quality. YouTube videos are getting longer and less popular. TikTok has drunk YouTube’s milkshake by prioritizing what YouTube started with: high-quality, open content that doesn’t conform to pre-existing profitability needs.
Google’s Cultural Suckage
Besides these specific problems, there’s a more general one. Alphabet just isn’t cool anymore. From a company that used to be known for churning out innovations at a frightening pace (think Chrome tabs, Gmail conversations, and the entire world of web analytics), they have somehow found themselves so corporate that Sam Altman would rather deal with Microsoft.
People in tech I’ve talked to all agree that Alphabet's products, particularly Google Search, have suffered a steep decline in quality over the past 5-10 years, even as its stock has run up to mind-blowing levels. Even if regular people still Google everything, the savvy folks tend to be early adopters, and their opinions tend to be a leading indicator for more widespread trends.
Taking a look at Google’s products, we see a lot of stagnation and even some decline:
Search: Has actually gotten worse as it’s transformed from constantly delivering the most relevant results to more of a news algorithm. (That’s just my personal pet peeve, but Search’s decline is actually a scientific finding.)
Gmail: Literally zero new features that are remotely impressive or interesting in the last 10 years.
Android: Very little knowledge since I am an iPhone user, but I have spoken with people who think it is getting worse.
Google Chrome: Still good, but no major improvements in quite some time, and a bigger CPU hog than other browsers.
Google Analytics: Not a major direct revenue driver for Google, but still a good bellwether: its redesign has made it worse than it was 10-15 years ago.
Google Maps: No new features.
Google Drive: Essentially frozen in time since its launch.
"Other Bets": Have you heard of any of these becoming popular in the last few years? No? Well, neither have I. Despite acquiring a cadre of incredibly promising companies (such as DeepMind, which produced the world's best chess computer in only a few months with their breakthrough AI technology), Alphabet has not yet had a home run here. More popular than any of these other bets is a site mocking Alphabet’s brutal mergers and acquisitions strategy: Google Graveyard, whose SEO on a presumably hostile platform is astonishingly good. (Try typing "killed" into our beloved search engine.) Alphabet is so focused on generating the next big hit that they have become as noteworthy as Netflix for killing promising upstarts.
It is extremely concerning that a company known for innovation hasn’t been able to radically improve a single one of its core products. Nor has a product launched in many years that people are broadly excited about. This is the sign of a company that has lost its edge.
Can Alphabet Twist Itself Into an Enterprise Software Company?
No doubt, Alphabet’s executives understand the problems facing their consumer businesses. That’s probably why they’ve launched Google Cloud and staffed it with aggressive salespeople. Google Cloud represents about 5% of the company’s revenue and has a 12% market share among enterprise cloud offerings. But there are a couple of serious challenges to turning Alphabet into an enterprise software company.
First, there is the issue of Google's culture. The company was made to solve consumer problems, not business problems, which are two very different things. Going from simple consumer software designed to have as few options as possible to enterprise software, where massive customization is required to meet the needs of very specific businesses, is so difficult that even Google may not be able to accomplish it. I’ve used Google Cloud software and it feels exactly like consumer software: simple, minimalist, few options, little customizability; this is the opposite of what enterprise users want.
Second, this is not the 1990s, and the fields just aren’t as ripe anymore. Companies have gotten far more tech savvy; executives are more likely to have a coding background and less likely to fall under the spell of a brand name and a convincing sales pitch. Google is used to being the market leader in its chosen fields, and may have a rude awakening trying to compete with experienced veterans Amazon, Microsoft, Salesforce, and even Oracle itself.
Passive Investing Has Covered Up These Issues
Without getting into the question of whether there’s a passive investing bubble (I would strongly argue there is), it’s easy once you’re in the S&P 500 to coast along and get bought by all the index funds out there. Index funds and 401(k)s buy Alphabet shares because it’s one of the biggest companies in the market, without considering any of these issues. The fund managers who would usually write papers about this kind of thing are no longer making the decisions as the passive strategy has taken over. That means it takes much longer for the market to become aware of business problems.
The person who asked me about the MAG7 was displaying a common perception: the MAG7 are all kind of the same. In this era of passive investing, it’s hard to blame someone for thinking that way. But in reality, the MAG7 are seven very different companies, and as I’ve outlined above, it might be time to stop describing Alphabet as magnificent.