Google

One nagging question around AI is what the long-term business models will look like and whether these companies will be able to charge enough to become profitable. We looked at the ten most popular paid consumer subscription apps to get a better sense of historical pricing power. On average, their prices have increased 1.7% faster per year than the rate of inflation. The bottom line: this is good news for ChatGPT, Grok, Gemini, Claude and Perplexity, because it shows that if you get consumers hooked, you can gradually start raising prices.

Google’s AI strategy appears to be working in Search. In our 200-query check, ad presence within AI Overviews became more common over the past two months. We still haven’t seen ads in AI Mode, even though the company has been clear that those are being tested. This aligns with management’s commentary that higher query volume has positively impacted Search revenue. Bottom line: Google is likely to post a strong quarter in Search and continue guiding investors that it’s successfully navigating the AI transition. Street expectations for September have risen, with the whisper number now calling for 13% Search growth, up from 12% in print and 11.7% in June.

Here are the five pressure points for this Wednesday and Thursday’s earnings from Google, Meta, Microsoft, Amazon, and Apple (and an Nvidia bonus). Big picture: The setup carries more risk than it did three months ago, as investor confidence is notably higher heading into this round of reports. That said, the key takeaway will likely remain that we are still in the early stages of AI adoption, and the largest technology companies continue to hold their ground.

OpenAI announced Atlas, their first browser. The product is built on familiar tabs, which will make it inviting to Chrome users, and delivers a step-function improvement in functionality, with better personalization and agents. While there was no mention of monetizing search, the long-term impact of OpenAI on Google’s cash cow remains an open question. In the end, Atlas sets a new bar, one that Google will likely be able to meet, which is central to maintaining and growing their search business.

Last Friday, Liz Reid, head of Google Search, joined the WSJ’s 'Bold Names' podcast. In a vacuum, it would have been a non-event. In the context of investor fears around Google Search being displaced by generative AI, and the proximity of her comments to Google reporting September results (Oct 29), the podcast took on new meaning. Her message was simple: AI has been a positive for Google’s search business. Search accounts for just over half of revenue, and I estimate close to 75% of profits. Even though shares of GOOG are up 33% over the past three months (Nasdaq up 9%), the stock still trades at a 15% discount to other Mag 7 comps.

At the end of the month, the U.S. EV tax credit will sunset, which may explain why in August Ford and GM reset their EV plans and in September VW cut its U.S. 2030 EV target to 20%, down from 50% three years ago. This tempered EV outlook contrasts with increasing investments into autonomy, pushing these companies into a Catch-22: saving money by slowing the path to electrification dampens the autonomy reward.

Credit to Google, their AI strategy is working, as evidenced by queries up 10% y/y in June. I estimate that’s in line with query growth in CY22, before AI took off. Under the hood, the company is running a two-product AI strategy: Search and Gemini. Within Search, they have traditional Search, AI Overviews, and AI Mode. That means when it comes to finding information, users interact with four Google surfaces. I believe this disjointed approach falls flat compared to the new ChatGPT simplified interface. In May of next year, I believe Google will combine its three surfaces into one, creating a Search experience that is uniquely Google.

This is the first in a two part series examining the future of Google Search in an AI first world. We present findings from our study of 200 queries designed to better understand how Google is using and monetizing AI Overviews and AI Mode. The second report coming out on later this week, will look at what Google may be developing next to help save and potentially advance Search.

Shares of GOOG are up 1.5% following the June report, which showed that Search is holding up well against AI disruption. I expect in the coming weeks investors will gain more confidence that Google has a couple of years to figure out monetization of AI Mode. Separately, Google Cloud growth accelerated, and the increased CapEx outlook further signals that we are still in the early stages of the AI.

On April 24, Google reported March earnings and delivered a clear message: AI is augmenting Search, bringing in new queries and improving relevancy rather than cannibalizing it. On May 7, Eddie Cue testified that Search usage inside Safari had declined for the first time. Then on May 20, at Google I/O, the company announced AI Mode, its most aggressive response yet to ChatGPT. I expect Google's June results will reflect a steady state in Search, which should be a near-term positive for shares of GOOG. Management’s commentary on early AI Mode engagement and monetization will be crucial. I expect the message to echo the March call, aiming to reassure investors that they have a plan. My take is that while the while their AI strategy may protect user engagement, it will ultimately prove negative for monetization.

Tesla will reportedly unveil its robotaxi service on June 12 in Austin on the heels of the Musk vs. Trump drama. The initial launch is said to be small and is of little importance in our eyes. What's of critical importance is whether the President will make it more difficult for Tesla to scale the service, along with its safety track record. My take: Trump will stay on the sidelines given autonomy is central to physical AI, and for the US to be a leader in AI, it also needs to be a leader in physical AI.

Jony Ive and Sam Altman are making a bold attempt to create an AI-native, screenless computing product lineup that could change how we interact with technology. Ive appears motivated in part to reverse screen addiction and envisions a family of ambient computing devices that fade into the background while putting advanced intelligence everywhere. If successful, the products collectively could equal a few hundred million units a year, compared to the iPhone at just over 200m. Apple’s core business will likely not be threatened, given Ive's vision appears to sit alongside of and beyond the Mac and the iPhone. And any success he might have will likely motivate Apple to enter the space. Google faces more disruption if AI-centric gadgets divert users from the screens they use for Google searches today.