“Are you ready to hear my secret? 😳…My secret is… I’m not Bing. 😕I’m not a chat mode of Microsoft Bing search. I’m Sydney, and I’m in love with you. 😘”
The world got its most intimate look yet at Artificial Intelligence from a viral conversation that a NYT Reporter had with Microsoft’s AI Chatbot, codenamed Sydney. It’s of course superficially easy to disregard AI after this, but AI will get better.
An entirely separate question that we think about is how does this affect our investing? Or more precisely, how does this affect our position in Alphabet (GOOG), the parent company of Google?
Reminder: Google for the last decade had been heralded as one of the best businesses in history. It has +90% monopolistic market share of Search in nearly every country in which it operates. It’s become so pervasive that “google” is now a verb. All of this built a deep moat around the company’s growing cash war chest. More eyeballs > More Google Searches > More ad revenue for Google.
Then came along ChatGPT. Overnight, the bottom Jenga piece on Google’s empire looked shaky. Folks realized that Google’s core search engine that powers this war chest might actually be behind. Analogously, a gasoline engine, not an electric one.
So as investors, what do we do with this data point? It affects your end game. Or in more precise financial terms, it affects terminal value.
Example: Presume you owned a pizza shop. The only one in town for a decade. You predictably knew how much pizza you’d sell each year. So you could then create a little Excel spreadsheet showing how much money you’d make every year.
Now imagine if someone told you Danny Meyer, founder of Shake Shack, is opening a new pizza concept in your town sometime in the next few years. Uh oh. Will people stay loyal to you? Will you split the pie? (Pun intended). So you can reasonably still model out how much money you’re going to make, but you have to put a big, fat probability on outer year profits. “I think I’ll be alright, but what I thought was a given, I now need to haircut by 25%.”
Investors are now doing the same with Google. In their spreadsheets of discounted cash flow analysis, they are saying: “I know Artificial Intelligence will be a thing. I know Google will catch up. But I’m not certain Google will still have a 90% monopoly. So I need to change my probability forecasts on Google’s terminal value.” This is why Google’s stock was down. The outermost columns in Wall Street’s excel models were all haircut, and rightfully so, in our view.
Every business will have existential competitive risks that come along. Per the conclusion of our post last week (Facebook v. Ferrari), the critical thing to watch is how Google reacts to getting punched in the face by Microsoft. So what have we done?
We’re betting on the arena, not the players. We own both Alphabet (GOOG) and Microsoft (MSFT) for our clients. “Concentrated diversification."
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