Why I just bought out some of my partners in my search biz (GOOGL)

Just bought out some of my partners in my internet search business segment.

Here’s why:

• google’s underlying biz continues to grow and drive strong returns.
• nevertheless, it is down quite a bit relative to the market as a whole.
• it is also cheap - for the same price I would have to pay to buy $100 of earnings on the S&P 500, I can buy about $135 of Google’s earnings.
• this is highly attractive, because google is likely to grow over the next 2-3 years at a faster rate than the market.

But what about A.I.?

• A.I. is a very real threat. It has already eaten away a 3% market share in the last year. And that will likely continue.
• but here’s the thing. Google mgmt knows that. And they are preparing for it.
• one thing they are doing is creating Google A.I. mode, which is basically just like the other A.I.s but is optimized to also serve up ads.
• so I think when google rolls this out to people, fewer will think they need to look to external A.I. providers and instead use Google.
• but I also think that other AIs are not optimized to serve up ads. In fact, they don’t seem to do it almost at all. Nor do they have the ad networks to make this workable or profitable… yet.
• by contrast, I think google is / will optimize its AI mode searches to really serve up ads. Similar to what Facebook did on instagram when people started looking at those photo sliders. It had to rework its ads, but it did so very successfully.
• finally, even though people are shifting a lot more searches to outside AIs, I don’t think they are shifting searches when they have product / buyer intent. Rather, these are primarily non-commercial searches and/or searches that would never have otherwise been done. Those are most of the searches flowing to AI - or at least that’s my guess.

So why buy out partners now?

• a news article hit this week that caused google to crater by around 6-7%.
• it was entirely on the idea that Google’s search metrics on phones may have peaked.
• and maybe they have. But this isn’t new news to me and is already baked into my assumptions re future growth.
• note also that, while search may eventually peak and even shrink (though I’m not convinced that is inevitable), the cloud biz and the YouTube biz and the services biz are all still growing at a healthy pace that may be enough to either fully or at least partially offset any shrinkage in the core biz.
• and finally, even if this search biz does someday become a no growth cash cow, they can still pay out huge amounts of dividends for years to come.
• im basically buying at around 17x earnings. That is one heck of a deal given this company’s means, expertise, and business.