{"id":46723,"date":"2023-08-10T08:13:01","date_gmt":"2023-08-10T12:13:01","guid":{"rendered":"https:\/\/ifintechworld.com\/investing\/search-giant-is-just-getting-started\/"},"modified":"2023-08-10T08:13:03","modified_gmt":"2023-08-10T12:13:03","slug":"search-giant-is-just-getting-started","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=46723","title":{"rendered":"Search Giant Is Just Getting Started"},"content":{"rendered":"<div>\n<p>Given the macro headwinds, not many investors expected the magnitude of the Nasdaq-100\u2019s rally through the first six months of 2023. Going into this year, we were positioned for bottom-line focused investment themes that we felt would be able to deliver earnings growth due to secular demand for its products, and in some cases, be able to reduce costs to maintain profitability.<\/p>\n<h2 class=\"subhead-embed color-accent bg-base font-accent font-size text-align\">Big Tech versus Tech Sector earnings<\/h2>\n<p>Below is an analysis of consensus earnings estimates from Zack\u2019s on Q2 Technology Sector earnings trends through July 26 plus expectations for the next three calendar quarters.<\/p>\n<p>For the past three quarters, sales and earnings have declined on a year-over-year basis. However, there appears to be stabilization as year-over-year comps get easier and the market is estimating a modest resumption of growth in Q3 and an acceleration in Q4 to Q124.<\/p>\n<p><fbs-ad position=\"inread\" progressive=\"\" ad-id=\"article-0-inread\" aria-hidden=\"true\" role=\"presentation\"><\/fbs-ad><\/p>\n<p>Meanwhile, Zack\u2019s looked at the earnings picture for the \u201cBig 7 Tech Players\u201d &#8211; Microsoft, Alphabet, Meta, Nvidia, Apple, Tesla and Amazon. The earnings profile for the Big 7 is estimated to be more robust compared to the overall technology sector.<\/p>\n<p>In addition to a better earnings profile, Big Tech prices and valuations have benefited from other factors that investors are seeking<\/p>\n<ul>\n<li>Focus on their AI capability and having the financial resources to make the required investments so that they make a positive contribution to future earnings<\/li>\n<li>Company size (i.e. large cap) and the ability to manage margins in the face of macro headwinds by meaningfully reducing costs but not at the expense of critical high ROI investments<\/li>\n<li>Credit quality &#8211; following Fitch Ratings\u2019 downgrade of U.S. government debt to AA+. <a rel=\"nofollow noopener\" href=\"https:\/\/twitter.com\/Beth_Kindig\/status\/1688964554179641344\" target=\"_blank\" class=\"color-link\" title=\"https:\/\/twitter.com\/Beth_Kindig\/status\/1688964554179641344\" data-ga-track=\"ExternalLink:https:\/\/twitter.com\/Beth_Kindig\/status\/1688964554179641344\" aria-label=\"Big Tech Credit\">Big Tech Credit<\/a> worthiness is on par if not greater than US debt. For example, Alphabet has the same AA+ rating.<\/li>\n<\/ul>\n<p>Amongst the Big 7, we believe Alphabet stands out for several reasons:<\/p>\n<h2 class=\"subhead-embed color-accent bg-base font-accent font-size text-align\">Year of Execution &#8211; Alphabet<\/h2>\n<p>Beginning in mid-2022, IO Fund began to transition allocation toward larger cap tech stocks because we felt they are in a better position to navigate a macro downturn. Big Tech has levers at its disposal to manage its margins by rightsizing its cost base. Importantly, at the same time they have the financial strength to make the investments required to capitalize on the AI opportunity and take market share from its weaker competitors. The medium-term bull case is that once revenue begins to meaningfully reaccelerate helped by its AI offerings, the combination of optimizing its cost structure and efficiencies garnered from technology investments leads to expanding margins. This is similar to Meta and its \u201cYear of Efficiency\u201d.<\/p>\n<p>At the moment we prefer Alphabet (GOOGL) over Meta (META). We see a similar story playing out for Alphabet and its \u201cYear of Execution\u201d. We believe it\u2019s in an earlier stage than Meta in its self-help process and its core business areas are just now showing signs of stabilization. Alphabet\u2019s margins are beginning to rebound and have now returned to the percentage they were at in Q1 2022. Meanwhile 1) Resilience in Search, 2) stabilization in YouTube Ads, 3) Market share and profitability gains in Cloud and 4) Growth in Other Google (i.e. YouTube subscription) make us optimistic that revenue will accelerate and there is upside to margins for the remainder of the year.<\/p>\n<p>In the recent Q223 earnings call, management commented on the QoQ strength in margins: \u201cA quick comment on the sequential improvement in operating margins in the second quarter. There are two factors to note. First, the benefit from an acceleration in search advertising revenue growth in the second quarter. Second, the vast majority of the charges related to our workforce reduction and optimization of our global office space were taken in Q1.\u201d<\/p>\n<h2 class=\"subhead-embed color-accent bg-base font-accent font-size text-align\">Search moat is strong<\/h2>\n<p>For all the hoopla surrounding ChatGPT and the belief that it will provide MSFT an opportunity to take share from Alphabet\u2019s core search business, it has yet to happen according to Search Engine. According to their analysis, Microsoft is losing market share. It peaked at 9.92% in October 2022 and is now at 7.14%. With its market position firmly entrenched, Alphabet has the audience to roll out its Search Generative Experience (SGE). On its own, the Search business has proved resilient because it provides advertisers an attractive ROI on their ad spend. Looking ahead, SGE will improve advertisers\u2019 ROI and will likely provide Alphabet additional pricing power. This will also improve their retail vertical. Meanwhile, consumer interest will further strengthen Alphabet\u2019s dominant market position in Search.<\/p>\n<h2 class=\"subhead-embed color-accent bg-base font-accent font-size text-align\">However, let\u2019s not forget about anti-trust trial<\/h2>\n<p>One of the reason we\u2019re very positive on the AI potential for Google\u2019s businesses is that it is sitting on the world\u2019s very best consumer data, which is not an exaggeration in the least bit. Its ability to lead in artificial intelligence and large language models should not be underestimated.<\/p>\n<p>Therein lies the issue. Google undisputedly has the world\u2019s best consumer data, but did this grow to become part and parcel with operating a monopoly? The Department of Justice has asserted anti-trust violations against Google with the trial beginning in September 2023.<\/p>\n<p>We anticipate two outcomes. The antitrust outcome will be mild, and Google will be empowered to continue to dominate. Or, the outcome will require the ad properties to be broken up, leading to a weaker stance for Google. This could benefit smaller ad-tech players, which we have identified and are monitoring closely.<\/p>\n<p><em>The I\/O Fund has been beating the drum <\/em><em data-ga-track=\"ExternalLink:https:\/\/io-fund.com\/artificial-intelligence\/ai-platforms\/nvidia-will-still-surpass-apples-valuation\">about AI for 5 years<\/em><em>. Now that it is here, we are targeting choice mid-cap to mega-cap names in the coming pullback. Once this exuberance runs its course, and the market gives up on AI, we will be buying the dip for this once-in-a-lifetime tech trend that is just starting. Join us the week following the holiday, Thursday, 8\/17, at 4:30 EST where we will go over the specific AI stocks we are targeting. We will provide the macro backdrop, along with entry prices.<\/em><\/p>\n<p>The I\/O Fund Analyst Team contributed to this analysis<\/p>\n<p>Please note: The I\/O Fund conducts research and draws conclusions for the company\u2019s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock\u2019s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I\/O Fund own shares in GOOGL at the time of writing and may own stocks pictured in the charts.<\/p>\n<p>If you would like notifications when my new articles are published, please hit the button below to &#8220;Follow&#8221; me.<\/p>\n<\/div>\n<p><script async src=\"\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script><br \/>\n<br \/>Read the full article <a href=\"https:\/\/www.forbes.com\/sites\/bethkindig\/2023\/08\/10\/alphabet-stock-search-giant-is-just-getting-started\/\" target=\"_blank\" rel=\"noopener\">here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Given the macro headwinds, not many investors expected the magnitude of the Nasdaq-100\u2019s rally through the first six months of 2023. Going into this year, we were positioned for bottom-line focused investment themes that we felt would be able to deliver earnings growth due to secular demand for its products, and in some cases, be [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":46724,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[239],"tags":[83],"class_list":["post-46723","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing","tag-featured"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v20.6 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Search Giant Is Just Getting Started | iFintechWorld<\/title>\n<meta name=\"description\" content=\"Given the macro headwinds, not many investors expected the magnitude of the Nasdaq-100\u2019s rally through the first six months of 2023. 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