Episode 39 | Google’s Role in Cloud, Search, and AI Dominance

In Episode 39 of “Market News with Rodney Lake,” Rodney Lake, Director of the GW Investment Institute, offers a deep dive into Google’s current business performance and challenges. He emphasizes that while Google's core advertising business remains dominant, the company also sees strong growth in Google Cloud. However, Google’s search dominance faces real threats from AI-powered competitors like ChatGPT, Grok, Claude, and DeepSeek. Despite concerns, the company boasts strong financials: a $2 trillion market cap, $350 billion in revenue, nearly 60% gross margins, and $70 billion in net cash. 

Transcript

Thank you for joining “Market News with Rodney Lake.” This is a regular program for the GW Investment Institute where we talk about timely market topics. I'm Rodney Lake, the Director of the GW Investment Institute. Let's get started. Welcome back to “Market News with Rodney Lake.” I'm your host, Rodney Lake. Today's episode is on Google. Welcome back to the GW Investment Institute's podcast, right here from Duquès Hall here in Washington, D.C., the George Washington University School of Business.

Welcome back to everybody who's been watching. Welcome to anybody that's new. If you're watching on YouTube, if you're listening to the podcast. Welcome. Great to see you in on the YouTube. And great, that you're tuning in on our podcast. So today we're going to go over a specific company. The company is Google. You've probably heard of it.

Its parent name is Alphabet. I'm sure you've all heard of Google. And you know what Google is. You possibly use Google every single day. And it's one of the important positions at the GW Investment Institute portfolio. Portfolio company. It's important. It's a larger holding. And certainly it's a well known company. People know about Alphabet, know about Google will call Alphabet, which the parent company Google for today because everybody's going to know that, the ticker GOOGL, for example.

There's a couple of tickers out there, but we'll reference that. So I think everybody understands what Google is. But we're going to go over the business, the management, the price valuation, the balance sheet. That is the Investment Institute framework. Now we developed that long ago. We've been using it. We've had some success with that. Part of the reason, I think it is because we took it from Warren Buffett.

He's had success with it, out of his one of his annual letters, we added the balance sheet to make sure our analysts, which are new, typically with no experience, to make sure they understand what's the risk, and the capital structure where equity holders, we don't own debt, at the Investment Institute as an investment. So for us, it's important to understand what is the balance of risk when we think about the capital structure.

So looking at the balance sheet in particular is very important. And that's why we call it out. So let's dive in. What's the business of Google? I think most people think well you know it's obviously search, and that's right, and Google services that is the vast majority of their revenue. The 2024 revenue, 304 billion just for that, that that is the vast majority.

And so when you think about advertising, paid clicks there, that is super important. And it's, you know, the breakdown, is quite even, actually, if you think about international and US, International slightly a little bit higher in the 2024 numbers. But, you know, so kind of 50/50, let's call it, to make it easy there on the numbers 179 billion and internationally 107 in the US, so slightly less in the US.

So tilts a little bit towards international. But this is very important. Now, other parts of the business, that are growing and doing well, that would be on the Google Cloud. That's the most other notable business. And that's been growing at 31% over the last three years. And if you look at the Google services, it's been growing at a much more modest it sort of 8.6% as a comparison.

So not, you know, not a terrible number to be growing at that. And certainly, on a huge base. But the business is still dominated by advertising, dominated by the search. But Google Cloud very important growing rapidly. And one of the big players, when you talk about who are the big players in the world of cloud, you think about probably AWS.

Right away you think about Microsoft Azure, you think about now Google Cloud. And I think rounding that top four out would be Oracle. And we've talked about this before. But certainly in a service that's very important. The Google Cloud business, going forward, I think it's making sure that we understand that, but again, dominated by what's happening on search now, people have been concerned about what's happening in search because of your friends at Microsoft and OpenAI in particular saying that, okay.

Well, if now I can go through my prompt, into my ChatGPT and I got deep search options in there and I can find all these things, maybe it makes my Google search a lot less relevant. And I think you're definitely getting some at least anecdotal feedback that people are using that as an alternative to Google. And now maybe people are doing both.

Another one now that has much more access to live information will be Grok 3 because it's connected to X, which was the old Twitter. And I definitely think people have DeepSearch. And that's one of the options on there. And I think people are using again, this is anecdotal right now. People are using that on search as well.

So I think the landscape for search is changing. For a long time people thought, you know, it's you know, Google's world and we all just live in it. And people, you know, had Bing. But if you ask who's using Bing, it would be, nobody. And in any case, I think this seems to be a real threat to the business of search for Google, because of the new set up, because of the new tools that these large language models have, relative to where search was, in the past, the page rank, where it came from.

So it's a very different approach. It's a very different setup, from where it has been now. Google needs to transform its business to make sure it adapts. And its answer to ChatGPT, to Grok, to cloud is Gemini. So Gemini, 2.0 now is, I'd say, sort of the laggard. And I would say in many regards, when you talk about the different aspects of the large language models compared to the, you know, what you would say is ChatGPT maybe 4.5, Claude, Sonnet, Grok 3.

And then you would probably put Gemini, there and then certainly on the, on efficient and reasonable DeepSeek right now certainly has a seat at the table for that. But again, this is creating a lot of pressure, let's say in the short term for Google to figure out, okay, its business model. It used to have this huge moat.

We love moats around the business. And you know, has been doing super well. So, you know, that's all great. So when we back up we talk about the market cap for the business, $2 trillion. This is a huge company. When we look at, you know, just some of the basic numbers. Let's dive into what's been happening.

You know, on the revenue side, market cap again, I mentioned 2 trillion. The revenue, 350 billion, overall growing it at 13%. We gave it a little bit of a breakdown, obviously growing faster in the in the world of the cloud versus the normal search, and now projected for 2025 calendar calendaring, is to be down actually, and then back up, 10% overall in 26.

So that's the consensus numbers. And if you look at the margins, these are fantastic margins, gross margins of 58% closing in on 60 there. And when you look at the net margins also very nice net margins, 28%. So this is a fabulous business. So when we talk about how do we score this business? This is a fabulous business.

Now if you would like to factor in the new threats, that probably puts a ding in the score. So if you look at well the gross margin is 60% at scale, or nearly 60% at scale and net income, nearly 30%, 28 at scale. $2 trillion company. $350 billion in 2024 revenue. So these are these are massive numbers, massive company and super dominant now.

But you would probably have to back out at least put something in there to say, well, there is a threat to the business. Finally. It's not Bing and it hasn't been Bing. And it wasn't Yahoo! And it wasn't Ask Jeeves. And it wasn't any of these companies, from the past. But it does seem like a real threat to their search business and the advertising that goes along with that is going to be one of these large language models.

Maybe it's ChatGPT, maybe it's Grok, maybe it's Sonnet, maybe it's DeepSeek. Maybe it's something that we don't know about right now, but certainly your ability to search, and as they incorporate more and more real time information in this, maybe it's going to be better to run that search that's provides much more customized results for the user.

When you look at the results that come out of some of these large language models. So you probably have to put a little ding in the business. So maybe the business you think is a nine. When we go over the specs that we just talked about, and the growth would be a sort of a piece where you would say, we'd have to pull it back for that as well.

And again, it's, it's dominant. And so it's hard to grow from here as well. But I would say it's probably something in the more of a seven right now. Until you have a good view on what's the response from Gemini. And again, Gemini seems to be behind all these other models. Now maybe they're going to catch up.

They invented the transformer. But we're late to the game, in deploying that and getting it to market, and certainly getting any monetization on that. Now, one of the things that you could argue on the other side of that coin is that because Google has an installed base of Gmail users, Google Docs, and they're putting this in there.

And so if you if you have those things, you can click on the little Gemini symbol and it will give you different suggestions, and certainly help you interpret your information in a different way. And so maybe like Microsoft, who has an installed base of enterprise customers, and individual users, in the case of Google, in addition to this enterprise, maybe that's the platform where they can push out Gemini.

Maybe it's not just Gemini as a standalone. That that's going to be the winner. It's Gemini as incorporated throughout their products. And so that would be the other side of the coin on the business side to say, well, hold on a minute. The yes, the business of search is going to take a thing. But Gemini, their large language model, is actually going to help them across the platform of their other products, and people are going to be more likely to use, and stay with their products on a go forward basis on the individual and enterprise level because of the functionality that's providing, you know, analogous to what, you know, the CoPilot is as

part of Microsoft in the back, the engine for that being ChatGPT and OpenAI, the engine for for Mic, that's the engine for Microsoft. The engine for Google would be Gemini. So but let's still let's take a ding, because that's where the revenue is coming from right now. The other part that people get concerned about is even with all that said about all the the work that people are doing in AI, where is the revenue coming from?

What are people actually paying for? Well, a lot of the models are free or near free. And so what what kind of revenue are they generating relative to the expense right now? These are still money losers for the most part. Certainly when you talk about scaling these things and so, these things are using cash, they're putting a lot of investment in what, what's the ROI specific to large language models for the largest companies?

Right now it does not look to be positive. But certainly you got to invest in the short term, for the long term so that that's super important. So for the business, again, a seven let's move on a little bit here and we'll come back and pull it all together. So when we talk about management not going to spend a ton of time here.

Sundar Pichai has been running the company for a while now, doing, I think, a fabulous job of taking over the company. From Larry Page, Eric Schmidt before that, you know, Eric Schmidt's the person who really came in and and institutionalize, and turned them into a a proper business. Right. They had certainly a great technology.

Eric Schmidt, then transformed them and did a great job. Larry Page, back in, ran the business for a long time. Sundar Pichai now running it for, let's say, over five years, doing a fabulous job. Again, we referenced, what's happening there, the growth, in the cloud business. Now, where could you be critical of management is.

Well, they haven't really done as much as, you know, maybe they should. They've been slow, to, you know, to the AI game when they were the leader. Right. They had DeepSeek. They, they built the transformer. Now this is connected to business, but I'm going to talk about it here at management because this is a management function when we talk about how this management allocate capital.

So Sundar Pichai now CEO and has been, you know, massive acquisition now, Wiz, $32 billion for this cybersecurity company. And what's that's kind of a signal if you look in the market to, you know, the the regulatory regime, antitrust, for Trump 2.0 or Trump 47, being favorable to allowing some of these big deals to happen.

So that is a big number. For Wiz and against cybersecurity. And there has been no word out this, is at the end of March in 2025. It certainly does not seem that the Trump administration is going to block it from what we've heard now, so far. But that doesn't mean it's not going to happen.

But there hasn't been immediate pushback, let's say, against that. So a huge acquisition for Sundar Pichai. So when you talk about allocation of capital, you could now make the other side of this argument that Google has not been aggressive enough. And getting product to market. Now they're being very aggressive, paying up for Wiz, $32 billion acquisition on the cybersecurity.

Again, back to they have this installed base for consumers for enterprise, and they can use Wiz, for that customer base, for the cybersecurity. So again, when you talk about management, you look at the numbers that we've talked about, you know, the gross margins, 58%, the net margins of 28%, this they're running it very well.

The company has, has been growing, and where you can be critical of management, not aggressive enough. They were early with DeepMind. They were early building the transformer. They were late to deploying that, behind ChatGPT. And you could even see behind others right now where maybe they sit, at the bottom of that lists or depending on how you shuffle it and what you think is important, where they are with the large language models, even though they happen to be the, the inventor of, or the developer of the transformer.

So but now the other side of that piece would be, well, Sundar is now getting very aggressive. $32 billion acquisition for Wiz going into the cybersecurity world we've talked about, CrowdStrike is one of our holdings, the cybersecurity world super important. And AI, you know, being maybe a, a play that you could say that that the cybersecurity is a derivative play of AI because they're going to have to use so much AI to make sure that all these things, work for the customers, that they remain secure, that they can get their work done.

And it's a cat and mouse game on this cybersecurity. So everyone's trying to outdo one another, always have to stay ahead. Again, massive acquisition. And so early to know. But me as an analyst, as a business person, as an investor, I read this as good news. I think it's good. I think that Google has been a little bit, slow, in this market, a little bit resting on its laurels, you know, a little bit, you know, complacent on the Google search side.

Certainly an emphasis on the cloud business, which is fantastic, but not enough emphasis on getting new products to market. Wiz, I think it's a good wake up call for everybody to say, wow, this is a big splash for them. And they're going after it. Good news, I think in general, to be aggressive, to be decisive.

Now, have they overpaid? You know what? We'll have to do a little bit more work on the deal here to understand that and see how it turns out over time. But I like the fact that they are moving, to be very aggressive in cybersecurity, I don't think it's going to be any less important moving forward.

And so I think this is, you know, a big splash and let's see how it plays out. But like the fact that they've, you know, maybe shifted the focus from, you know, being a little bit less aggressive now to being a little bit more aggressive. So I would give higher marks then for Sundar Pichai. And so maybe, before the acquisition was announced, it's a six now.

I think it's a seven on the management side. So a tick up for me on that. Now let's look at the price valuation. So we've gone through the business. We've gone through the management price valuation here. This is not a cheap company. But it's certainly not expensive. Right. When you look at what's the forward multiple and you possibly could even say this is I guess, cheap, depending on how you're looking at the world.

But the for PE is 18 times the it's basically the market multiple, a little bit cheaper. And so that is baking in where Google has had issues and again where its primary business, I think the market is saying is under pressure. And I think that's important to note and important to recognize. So you're not paying up for Google right now.

They are paying a modest dividend, by the way, to a yield of, 0.47%. So, not not terrible. And certainly for big tech companies, it's not why usually people buy them is for the dividend, but they are paying dividends in some of the other large tech companies, like Apple, for example, and Microsoft, they are paying a point for almost a half a percent.

So 50 basis points, 47 basis points, dividends. So not not terrible, but you're not paying up for this company. You're looking at 18.7 right now at the end of March. But we can say 19 times just to make it even. You're paying 19 times for Google. They're now being aggressive on the cybersecurity side, as we mentioned, the $32 billion acquisition for Wiz. Gemini, you know, maybe it's a, you know, maybe it's a sleeper right now.

Maybe they can use that to deploy against all their products. The cloud continues to be important. And, you know, they're certainly one of the key players on the cloud right now. And, and we'll see how that plays out. So, you know, you could probably give the valuation itself in eight right here. So that's a pretty good score.

So let's now we don't have to spend a ton of time on the valuation. I think the valuation to think about the valuation for Google, I think you have to consider why is the market giving it this low valuation compared to its peers? Right. Well, I think it is because that people believe that the search market is under pressure.

And I think it is I think it absolutely is. And I think the response to that is this big acquisition in a different part of the world in cybersecurity from Wiz, which I again, I, you know, a tick up to management for that because I think, you know, the search is under pressure. And if you look at all the models that are out there, you know, you can get good customize results on almost any of them and depends, again, which one you prefer, what information you're looking for, real time information.

Is let's say, different in all of them. And certainly, you know, grok leads probably in that at the moment. But over time, you know, real time information is likely going to be incorporated into all of them, which then puts real pressure, even more pressure rather on Google. And I think people now many times are are preferring to use a large language models search over a Google search and maybe they're doing both.

But that preference is shifting. And I think this is the first time in a long time where you've had a real preference shift for people, because you get these customized results, that Google doesn't provide a list of links, that's to Google, a customized result with some possible links or some, you know, follow up questions that you can ask, for the large language model.

So a different experience, more customized experience. Again, real pressure Bing wasn't real pressure. But, you know, ChatGPT, Grok, Claude, Deep Seek real pressure. Right. Gemini is theirs. So, so that's, you know, so we can probably give it 7 or 8. Let's call it a seven for, for right now. Based on, you know, what's happening, overall.

So now let's go and look at the balance sheet. So what's happening with the balance sheet? Not something terribly concerned about. Right. So you're talking about cash and cash equivalents of 95. And and total debt of 25, but 95 billion and 25 billion. So this is not something, you know, 70 billion here, in net cash is not something none of us are going to be super concerned, right.

You're going to say, well, 70 billion in net cash is going to help us sleep at night. And then you look down and what's the free cash flow? 72 billion as well. So the balance sheet, we're all sleeping like babies at night. No problem at all. That's a ten. So you're talking seven on the business.

Seven on the management, seven on price valuation and ten on the balance sheet. Again, 70 billion in net cash. We're all sleeping really well at night, producing 72 billion. So even if the business fell off, some, again, the net cash position alone is no issue. Now, one of the things that we like to consider and think about, and we're still going to give this a ten, is that they're actually their balance sheet has deteriorated a little bit.

You know, we look at it over time, you know, 100 and almost 140 billion in 2021 of cash down to 95. And they had 28 billion in net cash back in 2021. And so, you know, again, this is not this hasn't deteriorated enormously. Again, still 70 billion in net cash. But something that you should be paying attention to as an analyst.

And so with all those scores, let's pull it together again. Depending on, we could probably push one of the scores here or there a little bit more. We weight them 25% each business management price valuation and balance sheet. So you can look at that as a 7.25, as an example. And, you know, you could push and pull some of the scores, up or down seven and a half, you know, depending on, you know, maybe you want to do the balance sheet a little better.

You want to move one of the other scores up a little bit, but, you know, you're certainly not coming in at an eight and a half or anything like that based on what we've done. But, you know, seven is a good number. 7.25, seven and a half, 7.75. These are all good numbers. Right. And if you change some of the scores, maybe you get to an eight, which would be very strong.

Again seven is good, eight is very strong. And I think the principal concern when you're thinking about Google is the business. Right. The revenue predominantly comes from search, from advertising. And it's important to think about what is going to be the role of the large language models in competition with Google. And I think it's the first time in a long time that you've had real competition on search for Google.

Now they're busy diversifying into cybersecurity with the Wiz acquisition $32 billion. So that's a big splash. Good news for being aggressive on management I would say, you know, that's welcomed as shareholders to be a little bit more aggressive on that. They've made a bunch of small bets in their ventures. This is their first real big bet in a while.

So good for them. But time will tell where shareholders will continue to pay attention. It's important to think about. It's important to think about how they're going to restructure their business. But again, the predominance of their revenue comes from that search. And I think that is under threat. So it's time to pay attention as analysts, as businesspeople, as investors, we encouraging you if you're out there, if you'd like to pay attention, that is one area that I think, the market is shifting and it's an important time, to consider that, to think about that and to do research on that.

So again, overall, we're talking between a seven and an eight. If you'd like to really broaden out the score here on Google. We've gone through the business, the management, the price valuation, and the balance sheet. I hope you have enjoyed this episode. We will look forward to seeing you back on the next episode of “Market News with Rodney Lake.” Thank you.

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Disclaimer the content shared investments new podcast is for informational and educational purposes only and should not be considered investment advice. The opinions expressed in this podcast are those of the host and guests, and do not necessarily reflect the views of the GW Investment Institute or the George Washington University. Listeners should not act upon the information provided without seeking professional advice from a qualified financial advisor.

Investing involves risks including the loss of principal. The GW Investment Institute, the George Washington University, and the podcast host do not assume any responsibility for any investment decisions made based on the content of this podcast. Always conduct your own research and consult with a financial advisor before making any investment decisions.