Google

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.

Tomorrow’s Google I/O annual developer day is a big deal. It’s the company’s chance to prove it’s not afraid of the innovator’s dilemma and that it’s willing to take bold, outside-the-box steps to stay relevant in generative AI without blowing up the business model that built it.

There’s a shift underway in how people use search and it’s not going in Google’s favor. Last quarter, 56% of total revenue was from Search, and I estimate the segment accounts for 90% of profits. The company is still dominant, but their Golden Goose is falling ill. From Eddy Cue's comments at the Google trial, Apple is seeing declining Safari searches (Google) to rising AI competition, the headwinds are real. The stock may look cheap, but without a clear plan for navigating the post-blue-links world, it's likely going to get cheaper.

While the headlines around Eddy Cue’s testimony sparked concerns about Apple’s reliance on Google Search (shares of AAPL closed down 1%), the financial reality is less alarming. The Apple-Google Search deal contributes roughly 15% to Apple’s operating income. If that revenue were lost or reduced, Apple has several alternatives, including deeper integration with AI partners like OpenAI, Perplexity, and Anthropic, or even launching its own search product within Safari. My biggest concern is that this introduces a new risk factor into the investment case - one that may take time to fully resolve.

We evaluated AI’s staying power based on March earnings from key tech providers. Growth rates are not slowing as quickly as many investors had feared, suggesting that AI’s momentum remains intact. Concerns about the pace of improvement in AI models may actually strengthen the case for increased investment. Fundamentals and the outlook for AI growth and investment are either stable or improving compared to three months ago — despite ongoing uncertainty around tariffs, macroeconomic conditions, and the speed of model innovation.

​Don't let the recent downturn in the AI trade mislead you. The reality is that AI-powered service providers are struggling to keep up with demand, and AI infrastructure providers are unable to build capacity fast enough. All the potential that drove AI stocks higher in 2024 remains intact. At Deepwater, we continue to believe there are still 2–3 years left in this bull market.​

Deepwater’s second annual Frontier Tech Survey measures the American public’s viewpoint on emerging technologies, including AI, Electrification & Automation, the Creator Economy, and Relationship with Tech. Key Takeaways: AI – General usage is increasing but we are still early in the…