'Fast Money' traders react to Wednesday's slate of tech earnings

Key Concepts

• Search Fear: The concern that AI chatbots like ChatGPT could cannibalize Google's core search business.
• Gemini: Google's AI model, the successor to Bard, which is seen as a significant advancement.
• Microsoft-OpenAI Partnership: Microsoft's early investment and collaboration with OpenAI, which initially gave them a perceived lead in AI.
• Google Cloud: Google's cloud computing service, which is gaining market share but at a lower margin.
• AWS (Amazon Web Services): The market leader in cloud computing.
• Microsoft Azure: The second-largest cloud computing service.
• Cannibalization: The risk that a new product or service (like AI chatbots) could reduce sales of an existing product (like Google Search ads).
• Gross Margin: The difference between revenue and the cost of goods sold, indicating profitability.
• Enterprise Clients: Businesses that purchase services or products from other companies.
• Monetization: The process of generating revenue from a product or service.

Google's Strong Quarterly Performance and Shifting AI Landscape

The discussion highlights Google's impressive performance in the recent quarter, exceeding high expectations and beating on almost every metric. Despite the "search fear" – the concern that AI chatbots could threaten its core search business – this threat is currently not materializing. Instead, the company is demonstrating that its AI integration might be even more successful than anticipated.

Key Performance Areas

• Search: While the "search fear" persists, current performance indicates it's not impacting Google's core business negatively. The gap between Google's AI capabilities and those of ChatGPT is perceived to be narrowing.
• YouTube: Showed good numbers, contributing to the overall strong performance.
• Cloud: Google Cloud also delivered very good results, indicating continued momentum.

The Evolving AI Competition: Google vs. Microsoft

A significant theme is the shift in the AI competitive landscape. Approximately two to three years ago, Microsoft was seen as far ahead of Google in AI, particularly after announcing its partnership with OpenAI. However, the sentiment has changed, with Google now showing strong momentum.

• Microsoft's OpenAI Deal: Microsoft's initial deal with OpenAI involved an ownership stake and was valued at approximately $135 billion. The primary objective for Microsoft was to leverage Azure by hosting OpenAI's models and integrating them into their suite of services to upsell enterprise clients.
• Google's Gemini Strategy: Google's approach with Gemini (and its predecessor, Bard) is described as very different. The initial rollout of Bard two years prior was considered a "disaster," leading to investor concerns about cannibalizing Google's lucrative digital ad business.

Cloud Growth and Margin Concerns

Google Cloud has been gaining market share, challenging AWS (the market leader) and Microsoft Azure (the second-largest player). However, this growth comes with a caveat:

• Revenue Contribution: Cloud is becoming a larger percentage of Google's revenue.
• Lower Margins: Cloud services generally operate at a much lower gross margin compared to other business segments, which can bring down the overall gross margin for the company.

Monetization and Investor Sentiment

A crucial point of discussion is how Google is monetizing its AI advancements, which differs from OpenAI's approach.

• Google's Monetization: Google is seen as monetizing its AI integration in a way that is distinct from OpenAI, which will likely need to rely on ads and other services in the future.
• Investor Reassurance: Investors are reportedly coming around to the idea that Google is not cannibalizing its ad business as much as initially feared. Some analysts previously viewed AI as an "existential threat" to Google's core business.
• Google Overlays: The transcript mentions that "Google overlays" are actually a good way to enhance Google Search, suggesting a symbiotic relationship rather than a purely competitive one.

Valuation and Comparison to Meta

Despite the significant stock appreciation, the stock is still considered "not expensive" when considering Google's evolution, momentum, and current valuation multiples.

• Comparable Multiples: Google trades at similar multiples to Meta.
• Superior Outlook: The speaker expresses a strong opinion that Google's current trajectory and developments are "far better" than Meta's.

Conclusion

Google has delivered a strong quarter, demonstrating resilience and innovation in the face of evolving AI competition. The "search fear" appears to be subsiding as the company effectively integrates AI, with Gemini showing promise. While cloud growth is positive, its lower margins present a challenge. Investor sentiment has shifted positively, with a growing belief that Google's AI strategy is not cannibalizing its core ad business and that the company offers a more compelling investment case compared to peers like Meta. The stock, despite its recent gains, is still viewed as reasonably valued given its momentum and future potential.