- The recent rally has made the stock significantly overvalued, which seems unreasonable given the steadily deteriorating market share in search.
- My valuation analysis suggests that the business’s fair value is $1.7 trillion, which is approximately 27% lower than its current market capitalization.
- Google’s overreliance on search poses a secular problem for investors, as generative AI shows signs of disrupting the search industry.
- In the new era of generative AI, Google’s position is weaker as it lags behind OpenAI’s ChatGPT, with competition set to intensify.
Investment thesis
My previous bearish thesis about Google (NASDAQ:GOOG) (NASDAQ:GOOGL) (NEOE:GOOG:CA) did not age well because the stock gained 20% since April, significantly outpacing the broader U.S. market.
The massive optimism around Google is backed by its recent financial performance. However, as a long-term investor who heavily relies on fundamentals, I prefer to look beyond a company’s accounting books. The emergence of AI chatbots continues to disrupt the Search Engines industry, which we see from the rapid expansion of ChatGPT-powered Bing’s market share. The growth in Google Cloud revenue might be impressive without context. However, the company’s market share in this industry remains the same, which is miles away from industry leaders. In the context of these secular challenges, I think that the current premium valuation looks undeserved. All in all, I downgrade GOOGL to “Strong Sell”.
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