Google (NASDAQ:GOOGL) (NASDAQ:GOOG) is positioning itself as a leader in AI, investing heavily in its infrastructure to maintain its dominant position. However, the threat to its traditional Search revenue has already emerged, driven primarily by OpenAI and other models developed by companies such as Anthropic with its Claude AI. As a result, I anticipate a shift in Google’s revenue composition over the next 10 years. Fortunately, my valuation model indicates an 11% margin of safety for investment at this time, supporting a Buy rating.
Many users are familiar with OpenAI’s ChatGPT, which has revolutionized internet navigation. However, some readers may have limited experience with the technology, as Google Search continues to dominate the internet navigation market. As of August 2024, Google holds a commanding 90.48% share of the global search engine market. Despite the rise of AI-driven tools, traditional search engines like Google have maintained stable or even increased traffic. For instance, Google’s traffic grew by 1.4% from May 2023 to May 2024.
ChatGPT has gained exceptional popularity since its launch, reaching 100 million users within two months. By November 2024, it is estimated to have 180.5 million users, with 100 million active on a weekly basis. However, despite its popularity, only about 16.45% of traditional search engine users also utilize AI platforms like ChatGPT.
Given that we are still in the early stages of ChatGPT and OpenAI’s development, I believe there is significant potential for the current dynamics to shift in OpenAI’s favor over the long term. This shift could pose the greatest long-term threat to Google’s business. As of Q3 2024, Google Search and related services generated $49.385 billion in revenue, accounting for approximately 55.9% of the company’s total revenue of $88.3 billion for the quarter. Given current trends, it is not unlikely that Google Search’s share of the company’s total revenue could fall below 50% within the next five to 10 years.
In addition to OpenAI, other AI models are rapidly gaining prominence, including Anthropic’s Claude and Perplexity AI. Anthropic has established strategic partnerships, most notably with Amazon (NASDAQ:AMZN) Web Services, which provides the primary cloud infrastructure for training its AI models. Anthropic focuses on developing a robust family of AI systems designed with a strong emphasis on safety and research-driven innovation.
Perplexity AI, on the other hand, is transforming traditional academic research through advanced tools that enhance data retrieval and source collection efficiency. These innovations allow users to gather and analyze information more effectively than ever before.
These AI platforms offer capabilities that significantly surpass those of Google Search in many aspects. As these technologies evolve, I anticipate that many casual Google Search users will gradually recognize and transition to the advanced functionality of these AI-driven models.
The global AI market is projected to grow to approximately $3,680 billion by 2034. OpenAI’s partnerships with companies like Microsoft (NASDAQ:MSFT) allow for seamless integration of AI capabilities into platforms such as Bing, increasing the potential for disruption to Google’s traditional search model. Additionally, if AI platforms can deliver more targeted and effective advertising solutions, this could impact Google’s primary revenue stream from search-related advertising.
In response, and as part of its broader growth strategy, Google has been investing heavily in AI. Management views underinvestment in AI as a greater risk than overinvestment, allocating $13 billion in capital expendituresprimarily for AI infrastructurein Q3 2024 alone. Google has also introduced AI Overviews to provide users with comprehensive, AI-generated summaries of search queries. Furthermore, the Gemini model represents Google’s latest advancements in large language models, aimed at improving search accuracy and relevance. However, Gemini currently lacks the maturity and features of ChatGPT, which excels in advanced code-related queries and multimodal capabilities. While the Gemini Ultra model has outperformed ChatGPT in several academic benchmarks related to reasoning and understanding, anecdotal evidence suggests it offers less practical utility for a broad range of professional and personal use cases.
Google has trailing 12-month total revenues of $339.859 billion. The company has a five-year revenue growth rate of 21.3% and a one-year revenue growth rate of 17%. However, given market saturation and the threat from new entrants to internet navigation through AI, I am forecasting a 12.5% annual revenue growth rate over the next 10 years. Therefore, my estimate for the company’s total revenue in December 2034 is $1.104 trillion.
The company has an EBITDA margin trendline that has been moving down over time; however, given likely margin expansion related to AI integrations creating a leaner workforce, I anticipate that Google may have an EBITDA margin of between 35% and 40% by December 2034. To be conservative, I will use a terminal EBITDA margin of 35%. Therefore, my forecast for the company’s December 2034 EBITDA is $386.271 billion.
Google: The Long-Term Threat From OpenAI Is Significant
The company has a 10-year median EV-to-EBITDA ratio of 17.3; as its margin expansion in the future will be overshadowed by likely slower growth rates, I will use 15 for my terminal multiple. Therefore, my forecast for Google’s December 2034 enterprise value is $5.794 trillion. As the current enterprise value is $2.01 trillion, this indicates an 11.17% enterprise value CAGR over 10 years.
Google’s weighted average cost of capital is 9.99%, with an equity weight of 98.67% and a debt weight of 1.33%, with equity costing 10.12% and debt at 0.85% after tax. When discounting back my forecast for the company’s December 2034 enterprise value over 10 years at a discount rate equal to its weighted average cost of capital, the implied current intrinsic enterprise value is $2.236 trillion. As the current enterprise value is $2.01 trillion, my calculation shows an 11.24% margin of safety for investment.
As my valuation model demonstrates, despite the risks posed by OpenAI’s ChatGPT, I remain long-term bullish on Google stock. It is one of my largest portfolio holdings, primarily due to its robust growth and attractive valuation. Google continues to diversify its product offerings beyond search, expanding into cloud computing, hardware, and emerging technologies such as autonomous vehicles and healthcare solutions. This diversification contrasts with OpenAI’s concentrated focus on AI models. While this approach may provide risk mitigation, it also carries the potential downside of Google being a “jack of all trades, master of none.”
Evidence of Google’s ongoing strength, despite recent challenges, can be seen in the robust demand for its cloud services. Google Cloud revenue increased by 35% year-over-year in Q3 2024, driven by its AI infrastructure and generative AI solutions, which have attracted a large number of developers and enterprises. Therefore, the company’s positioning in AI should not be underestimated. While its traditional Search revenue may face pressure, Google’s diversification and effective penetration into other AI services are likely to compensate for any revenue loss.
Based on my analysis, the threat to Google’s traditional Search revenue from OpenAI is significant at this time. However, given Google’s strong diversification and its position as a likely long-term leader in multiple AI use cases, I expect its revenue composition to evolve as new market opportunities arise and consumer preferences gradually shift toward AI models for internet navigation. According to my conservative valuation model, the company offers an 11% margin of safety for investment, leading me to assign a Buy rating to its stock.
