Yesterday we saw mega cap GAMMA tech stocks slide with GOOGL tumbling 7.7%, a loss which extended another 4% on Thursday, after the company’s search & AI event revealed a glitch in the company’s AI algos. The loss – the worst in more than three months – slashed some $100BN in GOOGL market cap yesterday and another $50 today…
… because, as Goldman put it, “the CEO of MSFT wants to go after their search business” and sure enough Wednesday was the third worst percent change between GOOGL and MSFT (-7.37%) on a 5 year look back.
But is Google losing enough market cap that would wipe out some 420 S&P500 companies really merited? According to JPM senior TMT trader Ron Adler, the answer is a resounding no, and “the response from investors around AI has been very emotional and devoid of reality.” Why? Because as Adler asks rhetorically “will anyone change their homepage or no longer visit Google when looking for or thinking about looking for something? Probably not. Will we ever really use the name Bard in conversation? Also, probably not. How many of you use Siri or Alexa to conduct simple searches you do on your phone? A lot less than one would think. Old habits die hard, and Google will be hard to break.”
Below we excerpt from his full note:
Simply put, the outcomes are asymmetric for MSFT and GOOGL. Google is the incumbent, and AI presents the innovator’s dilemma for Pichai. MSFT has been trying to make Bing happen since 2009 and has yet to make a dent. MSFT is investing a lot of money in AI in a market that has latched on to AI (like they have previously latched on to blockchain and dot-com before that). Nadella noted that gross margin in search would “drop forever,” and investors in GOOGL fear a potential scorched earth plan by MSFT to gain share.
MSFT’s presentation Tuesday seemed innovative, vs. low expectations for Bing. The GOOGL presentation focused on maps and ways Google monetizes things. At the same time, MSFT’s event (which was very desktop-focused on a mobile world) placed unnecessary import on Wednesday’s GOOGL event.
The response from investors around AI has been very emotional and devoid of reality. Yesterday people were talking about how AMZN is behind on AI (they are not). AI/ML has been around for a while, but compute power, and better tools are making them mainstream; we’ve had chatbots for years (I’m 100% dating myself here but does anyone remember SmarterChild?).
Headlines of GOOGL’s AI getting an answer wrong underscore the market’s irrationality towards AI. Programming is moving towards a determinative path to one of statistics and probability. This migration won’t be linear and clumsy (and who knows, it could even breed a Terminator). From a business standpoint, AI could also prove VERY deflationary, not just for tech but for society (remains to be seen).
We are in the early stages of understanding the impacts of AI, let alone fully grasping the implications of the technology. In the near to medium term, will anyone change their homepage or no longer visit Google when looking for or thinking about looking for something? Probably not. Will we ever really use the name Bard in conversation? Also, probably not. How many of you use Siri or Alexa to conduct simple searches you do on your phone? A lot less than one would think. Old habits die hard, and Google will be hard to break.
And here is Bernstein underscoring the same point: “ChatGPT is a great piece of technology but MSFT is likely going to have a very tough time breaking into Google’s monopoly because they don’t control the channel.”
More in the full note available to pro subs.