🥀 Google not feeling particularly lucky

Alphabet took a shellacking this week after posting earnings on Wednesday evening that rattled investors. The parts of the business related to the AI trade were humming along rather nicely, with the Google Cloud business hitting $30 billion in revenue, beating expectations from the Street, with the company saying it plans to spend more money on AI next year. 

No, the issue for Google is that AI is actually hitting its moneymaker: search. 

• Alphabet whiffed on earnings per share, which came in at $2.12, well under the Street’ $2.99 consensus. It also posted negative free cash flow for the first time since going public. 

• Within five minutes of the opening bell on Thursday, $511 billion was wiped from Alphabet’s market cap. It clawed back a little bit over the course of the day, but that was the worst day for Alphabet shares ever with a 12.5% loss, beating the previous 11.6% one-day loss record notched in 2020. 

• While Google is a lot of things — business services, AI lab, lots of weird funky bets like Waymo — the profit flywheel that keeps the whole machine moving is ads sold on search. This quarter search was responsible for $63 billion of the company’s $128 billion in revenue. 

• Search growth slowed, and revenue was flat, as AI chatbots peel off Google’s share of the market for this kind of discovery – including Google’s own products, which appear to be cannibalizing its key business. 

On the earnings call, executives were pressed by JPMorgan’s Douglas Anmuth about the deceleration in growth. “It's worth noting that the strong growth in AI Mode queries had an impact because of the lower monetization we were seeing in AI Mode,” replied Google Chief Business Officer Philipp Schindler. “To be clear, we feel very good about our trajectory here. Our ad experiments have shown promising results, and we're now scaling ads within both AI Overviews and AI Mode to more users and more queries.” 

Google’s concession that it was indeed feeling the heat from a traffic drop because of AI was, in some media circles decimated by the “Google Zero” phenomenon, considered to be a bit rich. 

The Takeaway

This is, if anything, a textbook case of the Innovator’s Dilemma. AI was going to inevitably affect the number of people searching things on Google, and therefore it behooved Google to get into AI with the expectation that eventually that new business would eventually make up what’s lost in the search business. 

For the rudimentary B-School case study, just look at what happened when Blockbuster declined to invest in a streaming service. For a specifically relevant and directly applicable contemporary example, take a look at the number of questions being asked on Stack Overflow now that every coder on the planet has access to an LLM trained on every tech forum post ever written:

Google’s chart doesn’t look like this — congrats to Google — but its search business ain’t immune to the forces at play here. In a way that other Mag 7 rivals don’t really have to, Alphabet is going to have to deal with the fact that their shiny new toy is specifically designed to disrupt the boring, lucrative product that built the company in the first place.

— Walt Hickey

• 🏀 WNBA: This Saturday is Game 7 of the WNBA Finals, and it’s a literal 50-50 dead heat between Golden State Valkyries and the Atlanta Dream. 

• 🏈 NFL: This NFL Sunday features several major divisional matchups, including the Tampa Bay Bucs (57% favorites) taking on the Atlanta Falcons, the Kansas City Chiefs (53% favorites) against the Denver Broncos, and an SNF where the Philadelphia Eagles take on the Washington Commanders (71% favorites).

*Event contracts are offered through Robinhood Derivatives, LLC — probabilities referenced or sourced from KalshiEx LLC or ForecastEx LLC.

Sales of Labubu are down 70 percent to 75 percent in the United States as of this quarter, according to Pop Mart’s latest earnings, indicating what many feared to be a brief trendy fad that was doomed to fall out of fashion in a speculative bubble was, in fact, probably a brief trendy fad that was doomed to fall out of fashion in a speculative bubble.

• Earnings from AbbVie, Regeneron, and Exxon Mobil due out premarket.

• Q3 Employment Cost Index slated for release at 8:30 a.m. ET.