Gene Munster from Deepwater discussed Google’s financial performance, highlighting a significant growth rate of 19% in its U.S. business, driven by generative AI, while noting a decrease in capital expenditures and potential challenges related to gross margins and regulatory issues. He expressed cautious optimism about Google’s future prospects, despite concerns over its autonomous vehicle division, Waymo, and the financial implications of licensing deals with publishers.
In a recent discussion, Gene Munster from Deepwater analyzed Google’s financial performance, particularly focusing on its capital expenditures (capex) and the impact of generative AI on the company’s growth. Munster noted that Google’s capex has been decreasing over the past few quarters, indicating a shift towards more efficient investments in growth areas. He drew a parallel to NVIDIA, suggesting that despite fluctuations in Google’s capex, NVIDIA remains well-positioned in the market. Munster emphasized that this quarter’s report is one of the most significant for Google in the last decade, as it reflects the company’s adaptation to AI technologies.
Munster highlighted that Google’s U.S. business experienced a notable growth rate of 19%, surpassing expectations of 12%. This growth is attributed to the positive influence of AI on Google’s operations, marking a turning point after several quarters of uncertainty for investors. He expressed cautious optimism, stating that while challenges remain, this data point is encouraging for Google’s future prospects.
The conversation also touched on Waymo, Google’s autonomous vehicle division, which Munster indicated is not receiving much credit due to its relatively small revenue contribution of about $30 million annually. He suggested that Waymo might perform better as a standalone entity, but its current size limits its impact on Google’s overall stock performance. Munster expressed a desire for Waymo’s growth to be more significant, but acknowledged that it is unlikely to substantially affect Google’s valuation.
Addressing concerns about gross margins, Munster explained that the anticipated decline from 68% to 62% could be influenced by traffic acquisition costs and content expenses related to YouTube. He indicated that the company’s focus on efficiency, as highlighted by the CFO, could lead to margin improvements in the future. Munster anticipated further commentary on these issues during the earnings call, which could provide more clarity on Google’s financial outlook.
Lastly, Munster discussed the regulatory and legal challenges facing Google, particularly regarding its generative AI assistant and potential payments to publishers for content. He drew comparisons to past issues Google faced with publishers when it was emerging in the market. Munster estimated that Google might need to allocate up to a billion dollars annually for licensing deals with publishers, which could significantly impact its financials. Despite these challenges, he believes that the overall growth driven by AI could outweigh the potential costs associated with these legal and regulatory hurdles.