If you own shares of Google (NASDAQ:GOOG) you might be having a WTF moment today. Google reported earnings last night, beat estimates for revenue and earnings, and the stock is getting pounded today…
Stocks are supposed to rally after a nice beat, right? So what gives? Why’s Google getting thumped?
It’s because of ad revenue.
As the quasi-monopoly company for search, ad revenue is Google’s bread, butter, knife to spread it with and plate to serve it on.
And Google’s ad revenue has weakened. To explain why, I’ll use an example from my own industry…
We in the newsletter biz use Google keywords to attract readers and subscribers. We pony up for specific keywords that we think investors are searching for… like “gold stocks.”
If we like gold stocks and have some expertise with them, we might write a Special Report featuring our favorite gold stocks. Then, we “buy” the keywords “gold stocks” so that if you search Google for “gold stocks” you’ll see an offer for our Special Report.
The report is free, in exchange for agreeing to get our e-letter, Outsider Club. If it’s a good report (which if it’s an Outsider Club report, it is) and if you find the Outsider Club to be a useful and relevant resource (which you will), you’ll keep reading it.
That, in turn, allows us to sell ad space in the e-letter to pay our bills, and maybe offer a subscription service or two with more detailed, actionable investment ideas.
The benefit to you from this business model should be pretty obvious. Your humble editors Christian Dehaemer and I are incentivized to give you quality research and insight. If we do, you stick around. If we don’t measure up, you click “unsubscribe” and you’re gone, no questions asked.
You literally have all the power in this model. Well, you and Google…
Now, Google is so enamored with AI, it has decided to undermine its keyword search business model.
Google’s Big Mistake
Maybe you’ve noticed that lately, when you search Google for something, the first result you get is often an answer to your question generated by AI. And then the first actual results you get are a bunch of posts from Reddit…
Now I don’t know how familiar you are with Reddit. It’s basically an online forum, a bunch of message boards where random internet wingnuts are free to spout off unverified opinions and unvetted explanations for every topic under the sun.
You might find a reasonable answer to your search query from Reddit, you might not.
Or, if you’ve searched Google for a product or service, you will once again get Reddit results from random Reddit users telling you where they bought that product or service, what they think of it, etc.
Google is making it so you have to dig a little deeper to find original content from relevant, verified sources that could be considered expert or at least competent in their field.
The AI Lie
The obvious question is: why does Google think anybody gives a flying f*** what a bunch of yahoos on Reddit think about, well, anything?
The quick answer is: Google doesn’t care. Google is using the Reddit forums to train its AI models to speak more conversationally. And somewhere down the line, Google apparently believes that if it has the capacity to answer any and all search queries with its own AI chat bot , that will be powerful…
Which begs another obvious question: where will the money come from? This is the question that investors are asking right now.
Right now it is businesses that support Google’s ad business. We pay Google to let us appear in search results. Google is a middleman, it owns the market where companies and customers connect.
But now, Google is actually making it harder for companies to connect with customers. Businesses are losing customers and traffic to their websites. Companies aren’t paying Google as much anymore, so Google’s ad revenue is under threat.
To make matters worse, Google has ramped its CAPEX spending for AI. It is spending more, to make less. Seems like a bad plan…
The AI Lie
I’m going to refer back to the George Soros quote we’ve shared a few times:
Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited.
So what is the false premise with AI?
The lie is that AI will generate revenue. That if you build it, the customers will come…
Tech innovation is always deflationary. You switch from copper lines to fiber optic cables and long-distance communications costs plummet. Make transistors smaller and more efficient and computing costs plummet. The same will be true with AI.
It’s magical thinking for Google to act on the belief that its AI aspirations won’t impact core aspects of its business. Investors are waking up to that lie right now.
Now check out this chart:
This chart shows you the ten companies that bought the most GPUs from Nvidia last year. The numbers are in thousands. Combined, Meta and Microsoft bought 300,000 Nvidia GPUs last year. These units cost $25,000 each.
That’s $7.5 billion from Meta and Microsoft on these chips alone. Add ‘em all up and it’s over $16 billion in revenue for Nvidia in 2023. That’s well over half of Nvidia’s total revenue.
There will come a time when Nvidia’s customers have bought all the GPUs they need. There may also come a time when certain companies will realize that all this spending on Nvidia GPUs isn’t really helping their business.
The big lie with AI is that there is a return on the investment. It seems pretty clear that some of the investors who have ridden this AI wave understand that the premise of ROI is false, and they are getting off.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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About this sell-off
