"AI is one of the most profound platform changes ever, and Google will continue to be number one. ”
- Sundar Pichai, CEO of Google
After the release of the first quarter of 2024 earnings report, Google rose more than 10% after hours, and finally stood firm and joined the "$2 trillion club".
Judging from the financial report data, Google's total revenue in the first quarter was 80.54 billion US dollars, a year-on-year increase of more than 15%, and its net profit increased by 57% year-on-year, exceeding the expectations of Wall Street analysts such as FactSet Research and accelerating growth for four consecutive quarters.
Advertising and search continue to be the main components of revenue. Since the transition to AI, Google has been nurturing its cloud and AI businesses with "high market share and low growth rate" in its advertising cash cow business. It's just that for Google at the time, it was unknown when AI would be able to "cash in".
However, when Chatgpt was born, after first creating explosive applications in the direction of language models, Google completed the "elephant turn" in the voice of doubt, using its own AI infrastructure advantages, combined with existing businesses, and took the lead in running through a road of AI commercialization and monetization.
On the revenue side, the three major businesses have steadily exceeded expectations, how can AI reshape Google's business?
AI is reshaping the competitiveness of several of Google's businesses.
Specifically, Google's existing businesses can be divided into three categories: Google Services, Google Cloud, and Innovative Businesses. Among them, Google services can be divided into advertising business and other businesses.
Let's start with Google services. In the first quarter of 2024, Google Services revenue was $70.398 billion, beating expectations of $60.18 billion. Among them, Google search and other revenue was $46.16 billion, beating expectations of $44.98 billion. YouTube ad revenue came in at $8.090 billion, up 21% from $6.693 billion in the year-ago quarter and higher than expectations of $7.73 billion. Google's network revenue was $7.413 billion, down 1% from $7.496 billion in the year-ago quarter and below expectations of $7.52 billion.
Second, in the search business, Google still maintains an absolute advantage in user size and scale, and with the addition of AI, this lead is expected to continue.
SGE, Google's search engine released in 2023, is able to provide an overview of content through generative AI, give 3-5 recommendation results, and proactively make recommendations to customers. The addition of AI has further broadened the types of searches, providing more diverse search methods on the user side and enabling search engines to identify and respond to more types of complex questions on the application side.
In the context of SGE, the search engine can look at problems and respond from a human perspective, and it has completed the role transformation from passively "accepting questions and answering questions" to actively "understanding problems and outputting answers".
This change in role has also brought variables to the advertising business. In the face of user inquiries, the number of links given by AI is often limited, and the ranking goal of enterprises has changed from "first page" to "top three". This means that every advertiser is facing more fierce competition and needs to make more structural adjustments to the content and keywords of their own websites to increase the weight of AI recommendations.
Google has keenly grasped this demand and launched Performance Max in 2023, which uses AI-generated technology to automatically generate the headline, description, and relevant images of ads based on information provided by advertisers such as advertising goals, budgets, industries, audiences, and more, as well as match the most appropriate ad formats and delivery channels. According to Google, Performance Max helped thousands of advertisers increase conversion rates by an average of 30% during the beta phase.
Finally, the impact of AI on cloud services is even more significant. If the improvement of AI to Google services is more reflected in the improvement of search efficiency and advertising conversion rate, then AI has brought changes to Google Cloud at the technical and architectural levels.
At Google Cloud Next '24 in Las Vegas, April 9-11, 2024, Google showcased the changes that AI is bringing to cloud business:
"Google Cloud 宣布了新的 Cloud TPU v5p、A3 Mega 计算实例、机密计算 A3 VM 系列、Chrome Enterprise Premium 等更新,这些更新是AI带来的基础设施与安全性层面的增强。
Through the integration and innovation of AI technologies, Google Cloud improves productivity and optimizes application lifecycles through AI technologies such as its Gemini model family. Products include AI assistants, security operations, Gemini embedding in BigQuery and Looker, and more.
Deeply integrated with AI, Google Workspace has launched a host of innovations and enhancements, including a new AI video creation app, Google Vids, a preview of Google Chat's Gemini, and an AI Meetings and Messaging plugin to enhance the user experience for video creation, conversation summarization, real-time translation, email composing, and more. ”
These advances at the technical and architectural levels have directly contributed to the growth of cloud business revenue, and in the past 2023, Google Cloud has successfully turned a profit, and in the first quarter of 2024, Google Cloud's revenue reached $9.57 billion, a year-on-year increase of 28.4%, higher than the expected $9.37 billion, and the growth rate increased quarter-on-quarter.
Whether it is the search and advertising business with a high market share or the emerging Google cloud business, the "acceleration" brought by AI has allowed Google to "catch up" the lagging cloud business and innovative business through faster product iteration and deeper technical moats, and to "renovate" the search business that is already in an advantageous position, so as to take the lead in gaining market increment among many technology giant competitors.
However, it should be pointed out that despite Google's outstanding commercialization performance, its AI technology moat is facing a greater impact. How is Google responding to the challenge?
AI, the Shura field of the tech giants
Compared with Google's near-monopoly market position in the field of search engines, the AI field has long been surrounded by giants.
In the first quarter of 2024, Microsoft partnered with OpenAI to build up to $100 billion worth of data centers and develop the "Stargate" supercomputer. Its cloud business, Azure, achieved a year-on-year growth of 30% with the support of AI.
At the product level, Microsoft has launched a series of AI products and services, including Azure OpenAI services, Copilot Stack, development tools, etc., and is committed to building AI platforms and ecosystems, while at the R&D level, Microsoft has launched open-source machine learning frameworks such as ML.NET, and supports deep learning platforms such as TensorFlow and CNTK to promote the innovation and rapid development of AI technology.
Meta launched the Llama 3 open-source model on April 18, and upgraded the Meta AI assistant to inject AI power into Facebook, Instagram and other platforms. In addition, Meta and IBM jointly launched the "AI Alliance", uniting well-known companies and institutions such as Oracle, Hugging Face, Stability AI, Cornell University, and the National Science Foundation to launch an impact on the entire AI research and market.
Side-by-side, Google still faces stiff competition.
To this end, Google has significantly increased its investment in AI. In the fourth-quarter call, management also expressed a clear plan to significantly increase capital expenditures this year, and a new round of investment cycle brought about by AI will be restarted. In Q1 2024, Google's capital expenditure will reach 12 billion, nearly doubling year-on-year.
On April 15, DeepMind CEO Demis Hassabis said at the TED conference in Vancouver that Google will invest more than $100 billion in AI development in the future, and said that Google's computing power is higher than that of rivals such as Microsoft.
On April 18, Google CEO Sundar Pichai announced that it would accelerate the development and deployment of AI products through a team reorganization. All teams working on AI models will be grouped under DeepMind, led by Hassabis, bringing teams together to increase Google's speed in research.
The essence of the above actions is to make full use of Google's strengths - its advantages are that it has the best AI infrastructure in the world, high investment in R&D and talent concentration can ensure continuous innovation, and a wide range of applications can further test the ideas of geniuses with practice.
Specifically, at the software level, Google has launched star models and products such as AlphaGo, Transformer, and Gemini, and its self-developed Tensorflow framework has become one of the most popular AI frameworks in the industry. In terms of hardware, Google's artificial intelligence computing power chip TPU and the latest new CPU "Google Axion" based on Arm architecture have further reduced the cost of model training while improving computing efficiency.
These infrastructure investments have not only laid a foundation for Google's product technology, but also allowed capital to see Google's potential and have the opportunity to change its stock price and market capitalization position among the seven major technology stocks.
What kind of story does AI tell, and why Google is no longer underestimated
Despite its huge dominance in infrastructure, Google has long been the lowest price among the seven major U.S. technology stocks, and is less likely to be highly volatile. Previously, in the history of the U.S. stock market, the single-day market capitalization growth of more than $200 billion only occurred in two companies, namely Nvidia (276 billion) and Meta (204 billion). However, after the April 25 earnings report, Google's market capitalization soared by $225 billion, becoming the third company to increase its market value by more than $200 billion in a single day.
In the context of the previous two market capitalization surges, Nvidia, as the "shovel seller" in the AI gold rush era, has the absolute right to speak in the market and development prospects, and delivered financial reports that far exceeded market expectations, while Meta showed the company's confidence in the development prospects through 25% revenue growth and $50 billion in share buybacks in the fourth quarter of 2023.
The above cases are enough to show that in the U.S. stock market, long-term development is the most important thing for capital.
In the past, Google's "futuristic projects" mostly "ended up without a problem" and did not make it out of the lab. The "blowout" of AI and its related products has allowed investors to see the unlimited potential of Google to monetize the precipitation and commercialization of the past. This is the real reason for Google's valuation reconstruction.
With the continuous progress of AI technology and the deepening of commercial applications, Google is standing at a new historical node. From the innovation of search engines to the expansion of cloud computing services, to the full integration of AI technology, Google has demonstrated sufficient technical reserves and broad growth prospects. In the future, it is worth looking forward to how Google's AI story will be written.
Source: U.S. Stock Research Agency