Google breathes a sigh of relief as Bing’s growth slows (GOOG)

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Justin Sullivan

GOOG investment thesis remains adamant, post ChatGPT Hype

We previously covered Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) in May 2023, discussing its new accounting methods, which accelerated Google Cloud profitability and boosted the company’s earnings per share growth in the first quarter of 2023. 2023.

However, thanks to the intensifying AI competition offered by Microsoft-backed ChatGPT (MSFT) and updated Bing, we had concluded that GOOG execution may be uncertain in the near term.

Market share of search engines worldwide

statcounter, author’s graph

For now, it appears GOOG’s investors can rest assured about its leadership in the search engine market, as new data from statcounter suggests Google Search’s growing market share to 92.64% by June 2023 (- 0.47 points MoM/ +0.8 YoY), compared to 92.21% in November 2022 before the launch of ChatGPT.

More importantly, this expansion comes at a high cost to MSFT’s Bing, with its market share declining to 2.77% by June 2023 (inline MoM/ -0.43 YoY), down from 3.42% in November 2022.

This cadence implies the growing stickiness of GOOG’s offerings, especially as app downloads for ChatGPT and Bing slowed by -38% MoM in June 2023, with ChatGPT visits moderating by -11% MoM at around 51 million weekly visitors. It seems consumers have chosen to return to Google Search, after the hype has died down, with CEO Sundar Pichai likely breathing a sigh of relief for now.

The same has been speculated so far with the newly released Meta (META) threads and Elon Musk’s incumbent Twitter. While adoption has been fast and furious, with 100 million registered users within five days of launch, it remains to be seen how many might remain in the end, given Twitter’s large and loyal user base.

This could eventually impact how META monetizes its threads’ user base, although we’re optimistic about synergistic opportunities within the existing family of apps and its advertiser base. Only time can tell if the Threads hype could eventually die down like ChatGPT and Bing did.

Google Search organic and paid website traffic

semrush

Additionally, Google Search’s total organic traffic plummeted by -38.5% to 2.77 billion by June 2023 from 4.51 billion in March 2023, or -37% from 4.4 billion in December 2022 .

More importantly, its paid website traffic also dropped significantly by -11.9% to 20.39 million by June 2023 compared to 23.17 million in April 2023, or -1.4% compared to 20.68 million in December 2022, suggesting its FQ2’23 results could be impacted.

These numbers matter, since Google Search comprises $40.35 billion (-5.3% QoQ/ +1.8% YoY) or the equivalent of 57.8% (+1.8 points QoQ/ -0 .4 YoY) of GOOG’s FQ1’23 revenue, with potential impact on share prices post FQ2’23 earnings call.

Google graveyard

Killed by Google

While GOOG has fittingly sent more projects to the Google Graveyard, further streamlining its staff, it remains to be seen whether these efforts can possibly translate into its bottom line, compared to META’s immense success thus far.

We also need to remind investors that its SBC expenses have been deferred to the next three quarters, as well as increased AI R&D and capex in fiscal 2023, potentially impacting the ad giant’s profit margins and on the generation of FCF.

GOOG’s execution could be further impacted by the notable deceleration in ad spending even at a time of peak recession fears.

Market analysts already expect global ad spend in 2023 to moderate further to +5.9% year over year, suggesting a notable decline from 2022 year-on-year expansion of 6.4%, from 2019 levels of 24 8% and +10.2% from 2019 levels. This number is also based on the assumption that things can pick up in H2’23.

Otherwise, based on GOOG FQ1’23 advertising revenue of $54.54B (-7.6% QoQ/ inline YoY) and META advertising revenue of $28.1B (-10.1% QoQ / +4.1% YoY), we are already seeing hints of normalization in the results of the two advertising giants. This is a similar cadence observed by Vincent Ltang, EVP of Global Market Research at Magna:

Ad spend slowed to a standstill in Q1 2023 (+1.5% globally, flat in most western markets) due to economic uncertainty and lack of cyclical drivers. (ad week)

With GOOG and META holding 49.3% of the digital ads share, we believe their upcoming FQ2’23 results and future guidance may offer better clarity on the health of the global advertising market.

So, is GOOG stock a buy, sell or hold? GOOG share price 1 year

Commercial view

For now, GOOG stock has already rallied an impressive +39% from its November 2022 low, otherwise +12% since its FQ1’23 earnings call in April 2023.

GOOG 5Y EV/Revenue and P/E Ratings

S&P Capital QI

Additionally, there appears to be decent upside potential from current levels to our price target of $153.98, based on its NTM P/E of 20.95x and market analysts’ FY2025 adj EPS projection of $7.35 . This rating is also not high by any means, compared to its 5-year average of 25.15x and pre-pandemic average of 25.06x.

Accordingly, we cautiously rate GOOG stock as a Buy Here if the exercise matches investors’ dollar cost averages accordingly.

If not, bottom-fishing investors might consider waiting for a moderate retracement to the $105 April 2023 support level for a better margin of safety, with the Fed meeting upcoming in July 2023 which could trigger further volatility.

Investors may want to properly weight their portfolios, as we’re not sure the exuberance surrounding the current bull run can last through the supposed potential H2’23 recession.

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