Finally, Some Competition For Google (ChatGPT Vs. Bard) (GOOG)

This article was first posted in Outperforming the Market on February 12, 2023.

Google (NASDAQ:GOOG) (NASDAQ:GOOGL) has long dominated the Search industry, with 93% global market share in the market. That said, the recent barrage of announcements about new generative AI capabilities from the likes of Microsoft (MSFT) and Google has garnered much attention globally from technology enthusiasts and investors alike. Microsoft’s sudden sharp rise and challenge in Google’s dominant market as a result of OpenAI’s ChatGPT made me think that this is similar to the story of the tortoise and the hare. The hare today refers to Microsoft’s ChatGPT given how fast it has come out of the gates, while the tortoise refers to Google’s Bard given its slow and steady approach. Who will be the first to cross the finishing line?

I told members of Outperforming the Market that Google’s monopoly position looked threatened in an earlier article. I aim to share more in this article with a comparison between Microsoft’s ChatGPT and Google’s Bard. I will compare them and what it means for Google’s competitive position in the industry.

Investment thesis

With the recent news about new generative AI launching all over the world, this warrants an analysis into how this will affect Google. This is relevant to Google because generative AI will make Search better, more intuitive and natural.

The most important takeaway for readers is that Google finally has competition after a long period of dominating the Search market. And I mean real competition that is able to threaten its business. This is because I view generative AI as one of the key innovations to have been launched that will change the way we search. Given that Microsoft has somewhat of a first mover advantage as it looks to integrate ChatGPT into Bing and Edge, I believe this will certainly bring real threats and competition to Google’s Search business in the long-term.

The key thing is to be asking the right questions at this juncture. I think we will see Google be quick in releasing and adopting new technologies, although this will likely be lagging behind Microsoft for now.

Lastly, I think that while there are arguments that this new generative AI hype and ChatGPT will take a long time to move the needle, I argue that the fact that there is now competition in Google’s $225 billion global Search advertising market that will threaten its 93% global market share is the main reason why Google’s valuation has fallen drastically.

Google is now not invincible.

How is Search changing?

Google has been the pioneer and leader in Search for a long time.

The company has made the Google search experience a much better visual experience in recent years. Google also introduced multi-search, the ability to search using a combination of texts, images and videos, and Google Lens in recent years as more users increasingly look to search not just using texts, but also in other formats as well.

That said, there has been several problems with Google. Firstly, it was found that more than half of all Google searches and queries led to no clicks. This trend of zero-click searches has continued since 2016. Secondly, generative AI is able to improve the search experience of 40% click backs as users are finding that Google is not generating the most relevant answers for their queries.

I think that integrating generative AI into search is something that could improve the user experience significantly if it provides more relevant answers and a better search experience in general.

For Microsoft’s Bing, the integration of ChatGPT with its search algorithm has enabled its largest improvement in the search engine’s answers’ relevance in a very long time. As a result, I think Microsoft is definitely ahead of Google in its integration of generative AI into search, but at the same time, I do think it is still early days.

Google’s beta release of Bard and its investments in Language Model for Dialogue Applications (“LaMDA”), Pathways Language Model (” PaLM“), and Multitask Unified Model (“MUM“) does tell me that it is also investing significantly in this area although it may still be lagging behind competition slightly.

If Microsoft is able to gain significant market share on Bing in this period where Google is lagging its competition, Google could face a real problem for its business as it is unable to defend its dominant market share position. Every percentage point of gains Bing makes in Search market share, this represents an incremental $2 billion in revenue.

Google awakened by ChatGPT

Sometime in late 2022, ChatGPT was released to the public. The world was literally surprised by what ChatGPT could do. ChatGPT was meant to interact in a conversational way, allowing ChatGPT to answer questions, amongst other things.

In a short span of two months, ChatGPT has reached 100 million users. This is when you know that the technology works, it’s usable and people are interested in what it can do. This is when you know that it is likely to pose a threat to Google.

The speed at which these events have happened tell you how ready ChatGPT is to disrupt the current world we live in today. Microsoft recently announced that it will be integrating OpenAI’s GPT-4 model into Bing. This will provide users with an experience similar to that of ChatGPT in Bing.

At the same time, Microsoft announced that there will be a new version of the Edge web browser that includes the integration of AI technologies, enabling users to summarize search results and talk to AI chatbots.

I think that the incorporation and integration of AI technologies like ChatGPT into Search will bring a fundamentally different user experience. For one, Search may begin to look more like a chatting experience. What does this mean for Microsoft?

With ChatGPT’s generative AI capabilities and Bing’s core search algorithm, this resulted in the largest increase in results relevancy on Bing in two decades.

This is when you know that the competition is heating up.

Google releases Bard

Google needed an answer to the challenge ChatGPT was bringing.

Bard was entered into the chatroom.

Google released Bard as its challenge to ChatGPT. Bard was powered by LaMDA, and was to be first released only to trusted testers. The intention was to only release it to the general public at a later date.

However, Bard proved to be a weak challenger to ChatGPT as it cost Google $100 billion in market capitalization when it made a blunder.

In a Twitter ad, Bard gave an incorrect answer to this question: “What new discoveries from the James Webb Space Telescope can I tell my 9-year-old about?”

The answer it gave was that it took the “very first pictures of an exoplanet outside our solar system”. That answer was incorrect as the first image of an exoplanet was taken in 2004 by the European Southern Observatory’s Very Large Telescope.

This mistake certainly did not seem like much, but what it implies cost Google many billions of dollars.

The blunder made Google seem unprepared for the challenge ChatGPT poses to it, with its own offering somewhat lacking compared to ChatGPT. It also seemed like Google was rushing to release something that was not ready, which tells you how much of a threat they think ChatGPT is to their business in my view.

In terms of Google’s AI roadmap going forward, it remains to be seen the true potential of its AI capabilities. There have been some reports indicating that Google plans to launch about 20 new AI based chat products in 2023 during its Google I/O event in May.

Key questions to answer

With the launch of ChatGPT and greater use of generative AI in search, there are more questions than answers today as it remains early days for the technology.

The first is whether the first mover advantage in introduction of generative AI into Bing and Edge will lead to meaningful migration in search activity to the two search engines away from Google. At the end of the day, this will test the stickiness of the Google search engine as users have been so accustomed to use Google as a search engine. If we see meaningful market share gain by Microsoft’s Bing and Edge, and if this happens quicker than expected, this does imply that Google’s search business is threatened as consumer habits are changing along with improvements in technology. What this would mean is the longer Google’s Bard takes to launch, the more market share loss Google will see.

The second is who are the other players with generative AI capabilities. Apart from Google and Microsoft, other companies like Baidu (BIDU) and Alibaba (BABA) are working on their own generative AI capabilities. Thus, I think that in the next one to two years, we could see the industry landscape change drastically as it is still rather early days for ChatGPT and Bard. While these are the two we hear of today, the best and dominant generative AI technology could be one that is not launched yet.

Lastly, I think that the question of costs to scale remains with chat-based search. Generative AI is highly cost intensive to develop and service. OpenAI founder Sam Altman has stated that queries cost “single digit cents” and are far more expensive than traditional Search results.

I don’t think we will see all the more than 10 billion searches per day benefitting from AI search results, but Microsoft CEO Nadella did mention that he was willing to sacrifice Microsoft’s margins in the short-term to gain share in search.

Valuation

Google is trading at 15x FY2024 P/E. For a company with a monopoly in Search, this would have been a great P/E multiple for entry into the stock. That said, with the current narrative that Google’s monopoly in search looking threatening and unstable, I think that the current 15x FY2024 P/E is fair. Put another way, Google looks fairly valued at the current stock price. This is because of the uncertainty and headwinds that Google faces today. The ChatGPT and Microsoft threat is real as they are the first mover with possible market share gains in the near-term if Bard is not launched in a timely manner. Furthermore, there are likely many other players launching or in the works of launching ChatGPT-like and generative AI capabilities that could further increase competitive pressures for Google. The Google monopoly is threatened and thus, the current stock price is fairly valued, in my view.

Final thoughts

While it’s still early days for generative AI and its impact on Search, I think that the markets are moving ahead in pricing in what the worst case could be for Google if Microsoft gains traction in Search.

For Google, the fact that it was not the first to roll out ChatGPT-like capabilities was the first negative point. It has the largest market share in the global Search market and the most data for its models to train on but OpenAI’s ChatGPT’s release showed the world that Google may not be innovating fast enough. The second negative point is that it seemed like Google rushed the release of Bard to counter ChatGPT when it was not ready. And lastly, Bard does seem like it cannot compete with ChatGPT in the meantime until it is fully launched, giving Microsoft a head start in integrating ChatGPT into Bing and Edge to gain market share.

I think for Microsoft, this is the best opportunity to gain market share in the Search market given how out of position Google looks. The integration of ChatGPT features into Bing and Edge has resulted in the largest ever increase in search relevancy, which increases its competitive position and makes using Bing and Edge more compelling than before.

Questions remain for Google and generative AI in general. Is Google able to show investors AI capabilities that are superior or at least able to match ChatGPT? Is generative AI going to be the key factor for users going forward given the different user experience and better search relevance. At the moment, it is unclear who is the hare and who is the tortoise in the race.

Only time will tell. In the meantime, I choose to remain on the sidelines before Google demonstrates what it has under its sleeves.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.