Summary of the Thesis
In the realm of Alphabet Inc., widely known as Google (GOOG, NASDAQ:GOOGL), the stock market is factoring in an artificial intelligence (AI) risk that appears unwarranted.
The recent Gemini “controversy” presents a prime opportunity to acquire GOOGL at a discounted price.
Renowned investor Bill Ackman, echoing my sentiments, has highlighted Alphabet, Inc. as one of his major holdings, aligning with my significant investment in GOOGLE.
I maintain a strong buy rating on GOOGL, even post the recent market upsurge.
Reasons Behind GOOGLE’s Decline
In my previous analysis of Alphabet, I drew parallels between the company and PayPal (PYPL).
Despite both entities exhibiting double-digit growth, robust profitability, and market dominance, they have lagged behind their industry counterparts.
Could this be a strategic opening for astute investors? Bill Ackman’s stance certainly suggests so.
Google encountered substantial controversy stemming from the “Gemini” incident, triggering a notable stock downturn.
GOOGL stock sell-off (Tradingview)
Gemini faced criticism for generating an image depicting a black man and an Asian woman as WW2 German soldiers, alongside portraying some founding fathers as black individuals.
Acknowledging its missteps, Google halted Gemini, leading to the stock slump, albeit followed by a recovery in subsequent weeks.
Echoes of the Past
Interestingly, Google witnessed a similar scenario unfolding in early 2023.
Gemini and Bard sell-offs (Tradingview)
On February 8th, 2023, Alphabet unveiled Bard, a large language model (LLM) that erred in responding to a space-related query, precipitating a 9% stock decline in a single day.
Although share prices plummeted by 18% in the ensuing days, this setback proved temporary amidst a broader uptrend.
Evidently, capitalizing on the dip during Bard’s misstep would have yielded favorable results, akin to the Gemini incident.
Endorsement from Bill Ackman
Bill Ackman’s recent discourse with Lex Friedman delved extensively into Google and AI.
Pershing Square holdings (Datorama)
Google stands as the fifth-largest holding in Pershing Square, constituting over 12% of the hedge fund’s portfolio.
Based on insights from industry insiders, Ackman asserts that Alphabet rivals, if not surpasses, Microsoft (MSFT) in the AI race, cautioning against misconstruing prudence for lagging progress.
Given Google’s vast data access from search market dominance and substantial financial reserves exceeding $110 billion, it maintains a competitive edge over peers.
Moreover, the potential collaboration with Apple to introduce generative AI search on iPhones underscores Google’s prowess and resilience.
“When a business becomes a verb, that’s usually a pretty good sign about the moat around the business.” – Bill Ackman.
Another notable quote from the interview underscores the disruptive potential of AI.
“AI is the ultimate disruptable asset.” – Bill Ackman.
Despite AI’s nascent and unpredictable nature, GOOGL emerges as a stable investment avenue in this domain.
Valuation Analysis
Within the Magnificent five tech companies, Google continues to offer the most attractive valuation.
GOOGLMETAAMZNMSFTNVDAP/E Non-GAAP (TTM)26,8132,9862,4038,3969,67P/E GAAP ((FWD))22,8524,6143,6436,4239,20PEG Non-GAAP ((FWD))1,391,191,852,431,04Price/Cash Flow (TTM)19,0017,6122,1330,7379,17
Source: Seeking Alpha.
While Google boasts the most appealing P/E ratio among mega-cap tech stocks, Meta Platforms (META) and Nvidia Corporation (NVDA) appear more economical based on forward PEG estimates.
Nevertheless, Microsoft (MSFT), Google’s primary AI competitor, commands significantly higher valuations across metrics.
For enthusiasts of cash flow analysis, Google remains a lucrative option, trading at a mere 17x cash flow post the Gemini downturn.
In essence, Google stands out as the most attractively priced entity among the Mag 5, with ample growth levers at its disposal.
Potential Risks
However, there exists a possibility that Bill Ackman and I might err. What if Google fails to catch up?
The human factor remains the sole unpredictable variable.
While Google has exhibited a lackluster innovation track record in recent years, evidenced by the demise of Google Podcasts, CEO Pichai’s history of product innovation offers a glimmer of hope.
“Pichai joined Google in 2004, spearheading product management and innovation for a suite of client software products, including Google Chrome and ChromeOS, in addition to overseeing Gmail and Google Maps development.” – Wikipedia.
Conclusion
In essence, investors persist in underestimating Google. Not only does the company epitomize top-tier quality, but it also presents an exceptional value proposition and substantial growth potential moving forward.
