4 threats to Google's search business

Oct.30, 2024, 11:55 PM PT, by: StockHawk (origin link)

Google is a multinational technology company that specializes in online advertising, search engine technology, cloud computing, artificial intelligence, and more. It's a subsidiary of Alphabet Inc. and is known for its dominant search engine and innovative products like Gmail, Google Maps, and YouTube. While Google's search engine generates over 55% of its revenue, it faces several potential threats that could impact its long-term success. This article will delve into four key areas of concern.

Note: The following analysis is based on historical data and industry trends, and does not constitute financial advice.

Q3 earnings

Google's recent Q3 earnings report showcased strong performance, with EPS of $2.12 and revenue of $88.27 billion, reflecting year-over-year growth of 37% and 15%, respectively. Search revenue, a key driver, increased by 12% to $49.39 billion. Despite this strong performance, Google's search dominance faces several potential threats that could disrupt its future growth. Let's explore four key areas of concern.

Threats

Firstly, Regulatory Scrutiny: Google faces increasing scrutiny from regulators worldwide over its business practices, data privacy, and market dominance. Regulatory actions or antitrust lawsuits could significantly impact the company's operations and force it to adapt its business model.

For example, in August 2024, the Department of Justice proposed a series of sanctions to prevent Google from monopolizing the search engine market. Google plans to appeal this decision, but a potential loss could open the door for competitors to gain market share.

Additionally, Google is facing another antitrust challenge from the Department of Justice related to its ad-tech network. A recent trial concluded, and if the DOJ prevails, Google could face up to $100 billion in advertiser lawsuits, according to Bernstein analysts.

Secondly, Cybersecurity Threats: As a custodian of vast amounts of sensitive user data, Google is a prime target for cyberattacks. Data breaches or cybersecurity incidents could severely damage the company's reputation, lead to significant financial losses, and expose users to potential harm.

Thirdly, Evolving Consumer Behavior: Shifts in consumer behavior, such as the increasing reliance on mobile devices and social media, could impact Google's business model and revenue streams. To maintain its relevance and reach users effectively, Google must optimize its search engine and advertising platforms for mobile devices. Additionally, emerging trends like the growing popularity of social media apps and voice search could further challenge traditional search behavior and impact traffic to Google's search services.

Lastly, Competitive Landscape: The competitive landscape for search is intensifying with the rise of big tech companies like Microsoft, Meta, and Amazon, and emerging players leveraging generative AI technologies. These companies offer alternative search services, such as Bing, social media search, and product search, potentially eroding Google's market share.

The rapid advancements in AI, exemplified by tools like ChatGPT, Perplexity, etc., could disrupt traditional search paradigms and challenge Google's dominance. Some users have already begun to rely on AI-powered chatbots for daily tasks, potentially reducing their reliance on traditional search engines.

Google is undoubtedly aware of these challenges and is actively working to maintain its technological leadership and market dominance. The company is investing heavily in AI research and development, such as its Gemini project, and pursuing strategic acquisitions to strengthen its position.

Given these potential threats, let's now evaluate Google's stock valuation by examining its historical Value-to-EBITDA ratio.

Stock valuation

Google has demonstrated impressive revenue growth over the past seven years, as illustrated in the chart below. While this positive trajectory is likely to continue, potential regulatory hurdles and increased competition could impact future growth. If Google is forced to relinquish its dominant position in the search engine market, it could significantly hinder its revenue growth.

 

Over the past 10 years, Google's EV/EBITDA ratio has fluctuated between 11.14 and 21.68, with a median value of approximately 17.3.

 

As of today, October 30, 2024, Google's EV/EBITDA ratio stands at 18.29. Based on the historical trading range of the past 10 years, this valuation suggests a slight overvaluation compared to the median price of $166. While Google's strong Q3 revenue and earnings growth are positive indicators, the potential regulatory risks and increasing competition pose significant challenges. Investors must carefully weigh these factors when assessing Google's current valuation.

 

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