Google’s parent company Alphabet has been downgraded by several analysts over increased competition in the tech sector. UBS Equity Research Analyst Lloyd Walmsley joins Yahoo Finance Live to discuss Alphabet’s headwinds to capital gains and how other tech giants are leveraging artificial intelligence in their products.
video transcript
Julie Hyman: Another day, Alphabet was downgraded again. Analysts fear that I will become an increasing threat to dominance in the search engine market. Mr. Bernstein today downgraded a statement by Google’s parent company that increased competition would put a brake on the tech giant’s growth. It follows Monday’s UBS downgrade.
There, equity research analyst Lloyd Walmsley points to medium-term earnings risk and improved risk-reward skew for rivals Amazon and Meta. Lloyd is joining us now and speaking on the phone. Lloyd, thank you for being here. So why, looking at this competitive landscape, or at least the competitive menu they want to put their money into, do you think Alphabet is so unattractive?
Lloyd Walmsley: yes. There are several reasons. Fundamentally, I think the relationship between risk and reward looks better for Meta and Amazon.
If you look at what’s going on with Alphabet, they’re integrating generative AI. In the long run, it may pay off. But there are also headwinds. The new SGE experience with generative AI appears to push ads further down the page, at least initially. This could create headwinds for earnings in the short term.
Over time they will probably understand this. But it’s not entirely clear. And then there are some competitive concerns. I’m not too worried about Bing and ChatGPT. However, there is still a slight risk there. But Snaps also started to emerge, eventually leading to Meta moving to chatbots. Chat bots behave like search and may be able to serve search-like ads. This can lead to fragmentation in query sharing and chaos in monetization sharing.
On the other hand, if you look at the share price of a company like Meta, it initially trades at 17x earnings, as opposed to a much higher return on Google. We think it could grow faster in the meta. And his AI talk there is totally unappreciated. And we believe the Facebook app alone could generate up to $7.50 for bulls from a generative AI chatbot experience.
It could also affect Instagram and WhatsApp. And this has even greater implications for Meta’s business. Google on the other hand, what they’re doing is kind of an investment to stay in the same place. Again, aggressive sides can emerge over time. But in the short term, headwinds are possible. More questions remain as to why the stock is hitting its old target but not seeing enough upside for the new target. We sat on the sidelines all night, the night before yesterday, on the stock market.
Brad Smith: Lloyd, I think the question I always have, or at least a little bit of a headache, is how much these companies are going to spend on their AI ambitions. Recalling Meta’s earnings call, they said they plan to provide more guidance in the future on what their total spending on AI will actually look like.
Do you have a clearer indication of whether it’s meta or alpha? How much of these amounts could be included in a company’s spending, and how much would it benefit the business immediately and ultimately profit?
Lloyd Walmsley: yes. You’ve come up with a great question. It’s at the heart of many of the discussions we have with investors. We don’t know the details yet. But directionally, we are starting to see signs that they will spend their time here.
Google, for example, said on its fourth-quarter conference call that annual capex spending would be flat. After 3 months they say it’s over. And not only is it increasing, but there will be a major mix shift towards technological infrastructure and a reduction in capital spending on buildings and real estate.
Therefore, the actual capital expenditure on the server side increases considerably. Last quarter, Mehta said the company did not change its capital spending guidance. But it looks like there is a way to increase spending on generative AI. They said the existing plan doesn’t have much in it. But in the conversations that followed, I think they suggested that if the product was getting a lot of attention there, they might need to spend more.
So, as a result of the last quarter, we’ve taken meta capex estimates from the low end of this year’s range to the high end of our guidance range. And we’ve taken it a billion above the consensus next year. Therefore, we assume that they will spend their time there.
And there aren’t many details about Amazon, other than making it clear that while the company is cutting back on capital expenditures on the physical infrastructure side of e-commerce, it’s still leaning toward investments. not. Partly at AWS, the goal is to anticipate the expected demand from generative AI. Therefore, in general, and especially towards 2024, he expects capex to continue to increase across the megacap technology industry.
Julie Hyman: And I’m curious, Lloyd. These he’s not only on the side of the three companies but also on the side of their customers is it an increase or a redeployment because the big tech companies probably already have AI budgets . Are they just reintroducing it into generative AI from, say, machine learning that they were already doing? Or what does it look like?
Lloyd Walmsley: Great question. And what we discovered is that it varies from company to company. But for the most part, I think you can invest less in CPU-based infrastructure. So some are moving from CPU to GPU based infrastructure. GPU-based infrastructure is expensive today. And I think there will be a net increase. But part of it is going to get things moving.
And another thing I’ve heard in conversations with customers of cloud platforms such as AWS, GCP, and Microsoft Azure is that the desire to enable more generative AI is driving, to some extent, migration of entire workloads to cloud platforms. I mean it will be faster. So in terms of storage and compute, it can also help the underlying business.
But the bottom line is, we believe it will drive net growth, even if some of it comes from existing CPU-based capex.
Brad Smith: Lloyd, you said something very interesting earlier. And here we are in a hurry. But when generative AI really gets involved from the user’s point of view, and all kinds of advertisers who put their creative out there to make sure their message gets seen, It determines how, where and when some ads appear. That consumer, how will it be so different from what we’ve known for the better part of his 20 years?
Given the above, does the value of that ad placement change? In effect, are we going to be looking at another type of margin profile that search engines can generate?
Lloyd Walmsley: I don’t think it will change much in the end. I think our concern is that Google is optimizing its search page for a combination of user experience and monetization. And they’ve spent decades perfecting this. And this is just a big change. They understandably prioritize user experience first. This can cause short-term confusion.
There are already indications that over time it could look very similar to what the old search page looked like. But we think it’s wise to assume that while they’re effectively experimenting with this, there could be some disruption in the short term.
Brad Smith: have understood. Lloyd, thank you for taking the time to explain how you see some of the big tech companies across the street. Lloyd Walmsley, a UBS equity research analyst, said: This time, thank you very much.
Lloyd Walmsley: Thank you for calling me.
