The part of Google where Bill Ackman newly incorporated Google and wrote an investment letter.

New Position:

Alphabet Inc. (“Google” or “GOOG”)

Earlier this year, we launched a position in Alphabet, Google’s parent company. We believe that Google, as one of the greatest companies in the world, has deep barriers to entry and a huge network effect that underpins its core search business. After watching the company closely for a long time, we had the opportunity to acquire a stake in Google at an attractive valuation at a time when misunderstandings about its competitive position in AI obscured the high quality of its business and strong growth prospects.

Google is the dominant leader in the rapidly growing digital advertising market. Google has a market share of over 85% in search, and together with YouTube, it holds about 50% of the digital advertising market. As investment returns increase and improve, digital advertising continues to bring market share in traditional advertising formats such as TV and print, and it is expected to continue to drive the overall advertising market growth beyond historical trends. For example, the rise in e-commerce penetration in retail is a catalyst for shifting offline promotional and trade spending to digital advertising. With search and YouTube being two of the highest return and the most resilient advertising formats, Google is well positioned to benefit from the structural growth of digital advertising share in several categories.

Similarly, Google’s cloud business is one of the top three players in the oligopoly market, where many years of early-stage IT workloads are transitioning from on-premises to cloud and hybrid cloud solutions. This strong secular trend has enabled Google to grow overall revenue at an average annual growth rate over the past five years, which will continue to support near-double-digit sales growth.

We also believe Google has a significant margin expansion opportunity. Core Google Services revenue (excluding cloud and other bets) nearly doubled from 2018 to 2022, but profit margins only rose by about 100 basis points. The company is committed to improving cost savings, and recently reduced staffing by 6%. Given the basically fixed cost structure and high incremental margins in its core search business, we believe Google…

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This Year, Why Bill Ackman Added Google To His Portfolio For The First Time

It is one of the best companies in the world with deep barriers to entry into its core search business and large-scale network effects. After years of close observation of the company, it was able to buy a stake in Google in a highly attractive valuation because the high-quality nature of the business and strong growth prospects were ignored due to misunderstandings about its competitive positioning in AI.

• Search:

It has an 85% market share in the search market and 50% of the digital advertising market as a whole.
Google Search and YouTube, which have the highest return on investment in the advertising industry and the most resilient, are in a position to benefit from the structural growth of digital search advertising.

• Cloud:

Cloud is also one of the top three companies in the early-stage oligopoly market where multi-year IT workloads change from on-premises to cloud and hybrid clouds.
This allowed us to maintain a CAGR of 10% growth for five years and will continue to support near-double-digit sales growth.

• Margin Expansion Phase:

We also believe Google has a significant margin expansion opportunity.
From 2018 to 2022, sales of core Google services (referring to pure advertising) doubled, but profit margins increased by just 1%p.
We are trying to reduce costs and have recently reduced our workforce by 6%.
Due to the nature of fixed costs of advertising and cloud businesses, operating profit leverage can be achieved while investing in AI.
Google Cloud succeeded in blacking out 1Q23 and 2Q23 consecutive operating profit margins, and considering that the same industry such as AWS has an operating profit margin of 30%, cloud profit margins will continue to improve in the future.

• Share buyback, 4% of market capitalization:

With a very solid balance sheet and attractive program, it has a very large cash equivalent and buys about 4% of its shares each year.
A misunderstanding of Google that it’s lagging behind in AI

With growing concerns about the negative impact of AI on Google’s search business (MSFT Bingchat), Google has come down to around 16 times FWD PER, meaningfully discounted from an average multiple of around 25 times in the past. However, we think we are underestimating Google’s structural leadership in AI for several main reasons.

• First, a vast network:

Thanks to the company’s vast size and consumer habit of “Googling,” it has the world’s largest distribution channel to introduce AI into search and other app suites.
Google has more than 15 products that serve more than 500 million users, and six products that serve more than 2 billion users.
The scale of how deeply AI can be embedded in each product in the future is different.

• Second, we already have the highest quality data:

Based on a vast historical metric (weight, PageRank) on consumer behavior and search result queries, we can continue to enhance the moat of AI as much as we can access the highest quality training data.

• Finally, we have already invested heavily in AI over the past decade:

From the acquisition of DeepMind in 2014 to the proprietary TPU chip designed exclusively for AI, Google has consistently invested in AI/ML as a priority much earlier than other competitors and startups.