Dear Fellow Investor,
Mama said there’d be days like this.
That old Shirelles song has been stuck in my head all week, and if you own Google, you know exactly why.
On Thursday, Alphabet had its worst day in its entire market history.
Hundreds of billions of dollars in market value disappeared in a single session.
So what happened?
Google reported earnings Wednesday after the bell.
Its cloud business did great; revenue more than doubled, up 103% to $30.7 billion, and it has $560 billion of cloud business already signed and waiting to be delivered.
The question was search. Search revenue grew 12%, which sounds fine until you remember it was growing 19% at the start of the year and 17% last quarter.
And here’s the crazy part:
People are actually searching more than ever, the fastest growth in five years…
But more and more of those searches go through Google’s own AI Mode, and AI Mode shows fewer ads. Google’s executives said so on the earnings call.
Here’s how I see it:
Picture the busiest diner in Queens. The owner sees a place opening down the block that gets you your food faster, so he builds the faster version himself, right inside his own diner. Customers love it, more of them come in than ever, but they’re in and out so fast they skip the coffee and the pie, which is where the money was.
That’s Google right now.
The company is in the thick of “the incumbent’s dilemma.”
It could have protected the old search page and let somebody else take the customer, or it could build the new thing itself and eat some of its own lunch. It chose to eat its own lunch, and I think that’s the right call. Wall Street just hates getting the bill.
People keep asking me if Google gets disrupted and outcompeted.
I believe they’ll hang, and I believe that because we’ve seen this movie before.
IBM owned computing, then the PC came along and Microsoft took the crown. IBM lost more than $8 billion in 1993, and everybody wrote it off.
It didn’t die, okay? It reinvented itself and kept going.
Then Microsoft missed search and missed the phone, and its stock took until 2016 to get back to where it was in 1999.
And then cloud computing made it one of the most valuable companies on the planet.
That same night Google reported, Microsoft said its cloud grew 48%. These companies get knocked down, but the good ones get back up.
And let’s not forget who’s been buying.
Alphabet was Berkshire Hathaway’s biggest stock purchase last quarter.
And when CNBC asked about it in July, Warren Buffett said, “I initiated it.”
The man is 96 years old, he spent most of his career saying he didn’t understand tech stocks, and this is the one he went out and picked himself.
I don’t think he was buying it for the search ads.
But here’s the detail I want you to see, because almost nobody talked about it this week.
When Google reported, it also filed its quarterly report.
Buried inside is a line about its stakes in private companies, carried at $128.2 billion as of September 30th, and the filing says that’s “primarily” one private company.
Bloomberg has reported that company is Anthropic, the maker of Claude.
Think about that for a second.
The thing everybody’s afraid will eat Google’s search business is AI chatbots, and Google owns roughly 14% of one of the biggest.
On top of that, Anthropic has committed to spend about $111 billion on Google Cloud.
So if people move from Google search to Claude, Google gets paid as an owner and it gets paid as the landlord.
Do the math with me.
Wall Street took hundreds of billions of dollars off Google on Thursday.
The Anthropic stake alone is on the books at $128 billion, and that’s an accounting number, basically what Google paid plus the last private-round markup.
Anthropic filed its IPO paperwork in public this past Monday.
Once those shares trade, that stake stops being an accounting number and gets a price every single day, in front of everybody.
I’ve got gray hairs from days like Thursday, and I’ve learned that the day everybody panics is usually the day the market is reading the wrong line.
Now, Google is the easy way to get a pre-IPO piece of Anthropic.
I’m holding my Google shares, and I think the company does just fine.
But it’s actually not where I think the biggest money gets made. And I am not recommending buying into the Anthropic IPO either.
I put together a presentation on NVIDIA’s “secret supplier,” the company whose CPU architecture sits at the heart of NVIDIA’s newest AI superchips.
It’s so important that when NVIDIA tried to buy it outright, Google, Apple, Qualcomm and Amazon objected, and the deal was blocked.
I believe this single company holds one of the most important components in this whole story.
I’ve laid out everything in this presentation.
Believe me, I know days like this are no fun.
But I’ve been doing this a long time, and the days when the headlines are the scariest are usually the days when the setup is the best.
The Anthropic IPO is coming fast, and I want you positioned before the crowd shows up.
Enjoy the rest of your Sunday.
“The Buck Stops Here,”
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Written by Dylan Jovine