Alphabet is the best 'mag 7' stock to own for the next year, says Deepwater's Gene Munster

Key Concepts

• Generative AI and Search Competition: The impact of generative AI on traditional search engines and Google's ability to compete.
• Google's Search Growth: Acceleration in Google's search revenue growth, particularly in the June and September quarters.
• Gemini: Google's large language model (LLM) and its competitive standing against OpenAI's models.
• Investor Confidence: The effect of Gemini's performance on investor perception of Google's competitive culture.
• Distribution Channels: The importance of user access and habitual usage for AI products, comparing Google's and OpenAI's distribution strategies.
• Chatbot Adoption: The current low penetration of daily chatbot usage and the potential for future growth.
• Valuation Multiples: Analysis of Alphabet's stock valuation, specifically its Price-to-Earnings (P/E) ratio relative to historical averages and peers.
• AI Mode and Monetization: Google's strategy to integrate AI into search and potential monetization through a dedicated AI subscription service.
• Brand Perception vs. Habitual Usage: The contrast between OpenAI's strong brand recognition and Google's deeply ingrained user habits.

Google's Competitive Stance in the Age of Generative AI

The discussion centers on Google's (Alphabet's) strong position despite the rise of generative AI, with a bold assertion that the bear case for their competitive ability has been addressed. This confidence stems from two primary reasons:

1. Accelerated Search Revenue Growth

• Addressing the Bear Case: The initial concern was that generative AI would erode Google's search dominance. However, Google has demonstrably countered this by accelerating its search revenue growth.
• June Quarter Performance: Search growth was accelerated in the June quarter.
• September Quarter Performance: Google comfortably beat street expectations by 300 basis points in the September quarter, indicating a strong performance.
• Capturing Renewed Interest: This growth suggests Google is effectively capturing the renewed public interest in information discovery and channeling it into search revenue.

2. Gemini's Competitive Prowess and Cultural Reignition

• Head-to-Head Competition: The introduction of Gemini has demonstrated Google's capability to compete directly with OpenAI in the large language model (LLM) space.
• Investor Encouragement: This competitive parity is encouraging for investors, signaling that Google's culture has been reignited to compete effectively.
• Future Distribution Playbook: The expectation for the next year is a significant focus on distribution strategies for these AI products.
• Untapped Chatbot Market: The current daily usage of chatbots is estimated at only about 20% of the population, highlighting a substantial opportunity for growth.
• Potential for Multiple Expansion: The speaker believes this competitive strength and growth potential could lead to an expansion of Google's valuation multiple.

Addressing Concerns: ChatGPT Distribution and Alphabet's Valuation

The conversation then delves into counterarguments and clarifications regarding potential threats and the stock's current valuation.

Distribution Advantage: Google vs. OpenAI

• ChatGPT's Distribution Strategy: While OpenAI has built a strong brand, their distribution has relied on Apple's platform, which has not been a significant driver to date. A new opportunity arises with the new Siri in spring.
• Google's Habitual Distribution: Google's distribution is described as "habitual."
  • Daily Google Search Users: Approximately 2.5 billion people use Google Search daily.
  • Daily ChatGPT Users (Estimated): Estimated at around 500 million daily users.
  • Weekly ChatGPT Users (Reported): OpenAI reports 800 million weekly users.
• Maturity vs. Youth: The significant difference in user numbers is attributed to the maturity of Google Search (having been around for a long time) compared to the newer OpenAI offerings.

Alphabet's Valuation Analysis

• Current Trading Multiple: Alphabet is currently trading at 28 times forward 12-month earnings.
• Comparison to "Mag Six": This multiple is in line with the broader "Mag Six" group, excluding a specific outlier (implied to be Meta, trading at 170x).
• Historical Average: Alphabet's historical average P/E over the past five years has been around 20-23.
• "Measurably Above" but Not "Egregious": The current multiple is measurably above its historical average but is not considered egregious.
• Upside Potential: The speaker believes there is potential for both multiple expansion and upside to earnings.

The "Old vs. New" Dynamic: Brand Perception and Monetization

A key point of discussion is the contrast between established brands and new entrants in the AI space.

• OpenAI's Brand Strength: OpenAI and ChatGPT are recognized as the "new generation" and have a strong brand identity in the chatbot market.
• Google's "Dusty" Brand Perception: Google's brand is sometimes perceived as "dusty" in comparison.
• Habitual Usage as a Moat: Despite brand perception, Google's strength lies in its habitual usage by billions of users.
• AI Integration and Monetization Strategy:
  • AI Overviews: Google is integrating AI into its search results, offering "AI overviews."
  • "AI Mode" Button: A button for "AI mode" is presented to users.
  • Steering Traffic to Pure Gemini Mode: The strategy involves steering traffic towards a dedicated "pure Gemini mode."
  • Potential $20/Month Business: This could lead to a significant new revenue stream, potentially a $20 per month subscription business, which would be a substantial portion of OpenAI's current consumer business (estimated at 80% of OpenAI's business today being consumer-side).

Synthesis and Conclusion

The core takeaway is that Google is demonstrating resilience and strategic advantage in the evolving AI landscape. While OpenAI has established a strong brand in generative AI, Google's massive, habitual user base for search provides a powerful distribution channel. The successful integration of AI into search, exemplified by Gemini's competitive performance, is not only addressing concerns about Google's future but also opening up new avenues for monetization. The current valuation, while higher than historical averages, is seen as justified by this renewed competitive vigor and future growth potential, particularly through the proposed dedicated AI subscription service. The significant untapped market for chatbots further underscores the opportunity for Google to leverage its existing infrastructure and user habits for substantial growth.