Google Investment Case!

Search, Cloud, YouTube, and AI

Jan 19, 2025

Google revolutionized how people search for information and created one of the best high-moat businesses in the world!

For over 2 decades, “Google” has been used as a verb when people want to search the internet. Today, however, the narrative around the company is worse than ever. Despite their massive financial success, the age of AI that started with the release of ChatGPT has brought dark clouds over the company.

Many investors believe rather than being the beneficiary of the AI revolution, Google will be one of its biggest victims!

I find this notion ridiculous, and in this Google Investment Case article, I will present my case for why I find the company a great long-term investment, with many positive trends driving its growth story.

In this article, I will look at Search, Cloud, YouTube, Waymo, and the Valuation. Lastly, I will present my take on AI and the Breakup risk!

Let’s have a look!

1. Search

2. Cloud

3. YouTube

4. Waymo

5. AI and the Break-up

6. Valuation

7. Conclusion

Tìm hiểu hệ sinh thái Google: Ông lớn trong lĩnh vực công nghệ

1. Search

Search is, of course, Google's largest and most important business. With a 90% global search engine market share, Google dominates this industry. Billions of people use Google every day, generating 8.5 billion queries. Moreover, research suggests that 68% of online experiences start with a search engine, and 93% of all web traffic comes from searches! This means that Search is the most important activity on the internet!

Some have even called Search “the best business in the world” because it essentially functions as an aggregator of the entire internet!

Google captures and organizes our online information in a way that is both indispensable to users and highly monetizable. Its search engine acts as the primary gateway through which people access knowledge, entertainment, and more, making it the ultimate intermediary in our connected digital age.

Intermediary businesses can be very profitable because they act as connectors between supply and demand. People want to consume content(Demand), whilst websites need viewers to earn income(Supply). Google connects the two parties, taking a cut of the economics.

Google’s dominant position and massive scale enable the company to earn extremely stable, high-margin revenue.

In the last 12 months, as of Q3 2024, this segment earned the company $192B!

In the graph above, we see that despite its already massive scale, search continues to grow at a rapid pace every year. Since 2017, this segment has grown by 175%, a CAGR of 16%.

Mordor Intelligence believes that the industry will grow with a 13.6% CAGR till 2030. While Google search is likely to lose some market share with the rise of AI-driven new entrants. I don’t believe Google Search will see meaningful market share erosion.

Here is why I find it likely that Google can grow this division with at least an 11% CAGR till 2030:

Google’s Dominance – The company has 90% of the global search engine market share. The fact that Google Search is not available in China, the world’s largest internet market, makes it especially impressive. People want one thing from a search engine, to have the best results possible. The only way to create the best search engine is by trial and error. Google processes billions of searches and makes constant changes to its algorithm to improve the results. The more searches, the better the algorithm becomes. This dominance makes it unlikely that Bing, ChatGPT, or anyone else will easily disrupt Google.

Growing Internet Adoption – Internet access in Africa and many parts of South America and Asia is still low. Let us remember that only 67.5% of the world’s population has access to the internet. When people gain access, Google often becomes the first service they start using. This means that there are 2.6 billion people that are yet to use Search. As the world moves towards 80%, 90%, and even 99% internet access rate, Google Search is set to gain billions of new users in the next decades. With 100s of millions of people set to start using Google by 2030.

Innovation – Google has a proven track record of innovating and improving its services. As someone who has used various search engines, I can honestly say that theirs is the best. In the picture below, you can see the results for a search “Bangkok weather by month”.

I invite you to do the same search in Bing or DuckDuckGo. In Google, I see exactly what I need instantly, the other search engines, however, are a cluttered mess. I could give you plenty of cases where Google Search is superior. Constant focus on customer experience and a large data advantage have enabled Google to build the best and easiest-to-use search engine available. Google Search is already starting to roll out AI summaries that will improve the results even more!

Ecosystem – Google Search doesn’t just operate on its own, it is a key part of Google’s overall ecosystem of services that include Maps, Chrome, Gmail, YouTube, Android, and more. Many of these services are leaders in their segment and are synergistic with Search. Chrome’s position as the leading internet browser guarantees a steady stream of queries. Maps and Search drive traffic for each other and generate usage data that can be analyzed to improve both products. The control of Android embeds all of Google’s services at the heart of the most popular mobile operating system. The ecosystem is a self-reinforcing growth loop where services integrate to deliver a superior customer experience that supports higher adoption and reduces churn.

Digital Advertising – Advertising dollars are always chasing people’s attention, and as screen time grows, advertising dollars are set to follow. Google is the most well-known and safest brand, so it is in a great position to capture a large share of this global shift. Additionally, the current digital revolution has birthed many new businesses, such as streaming, SaaS, E-commerce, D2C businesses, and more. The nature of these businesses requires constant advertising to acquire new customers and keep existing ones. The flexibility and scale of Google Search allows advertisers to quickly reach a lot of people. As a result, Google’s pricing power is poised to increase, enabling it to increase prices for keywords. Additionally, some analysts have suggested that with AI reducing the operating costs of certain digital businesses, many of them will choose to reinvest these savings into marketing to acquire new customers. Understandably, higher demand leads to higher prices, aiding Google’s bottom line.

2. Cloud

Google Cloud segment sells infrastructure as a service (IaaS) products to developers and large enterprises. Since the dawn of the internet, large organizations have had to invest significant resources in server farms. Sometimes placed in the basements of their offices, these servers are expensive to build, difficult to maintain, and time-consuming to upgrade. So, it’s not a surprise that many organizations, especially non-tech ones, are increasingly choosing Cloud services due to their flexibility and ease of use. Google, with its Cloud offering, enables organizations to store data on Google’s servers and upsell them with various ancillary services.

While Google was late to the Cloud party, it is quickly catching up!

In the last 12 months, as of Q3 2024, the Cloud division reached $40.5B in sales, a 10-fold increase from 2017!

Additionally, 2023 was the year this division became profitable, with $1.7B in operating income. As of Q3 2024, the operating profit has more than doubled to $4.9B, indicating that Google’s Cloud operations have reached economies of scale.

Precedence Research believes that the global Cloud infrastructure market will grow with a 12.3% CAGR till 2034, reaching $838B!

Many trends are driving the growth of the Cloud market. For instance, AI is creating unprecedented demand for processing power, with many AI start-ups raising billions of dollars to be used for training their models. To support this, Google has invested billions in AI start-ups through its venture capital arm. Moreover, the market for IoT and other connected devices is projected to double from 2023 to 2030. These devices will create immense demand for powerful, scalable, and secure cloud solutions, and Google Cloud has many partnerships to service this demand.

Overall, Google Cloud is well positioned to grow for decades and will likely become a significant profitability driver for the group!

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3. YouTube

In 2006, Google acquired the small internet start-up for $1.65B. While, at the time, many questioned the price tag for a company with just 20M monthly active users, today it seems like a huge bargain!

As of December 2024, YouTube has more than 2.7B monthly active users and over 110M active channels.

In 2017, Google first disclosed YouTube’s advertising revenue of $8.2B. In 7 years since, revenues have grown by 328% to $34.9B, a CAGR of 24%!

The purchase of YouTube is undoubtedly one of the best acquisitions of all time!

Here are the main factors supporting YouTube’s growth in the next decade!

Cord Cutting – There is no way to sugarcoat it, the old cable bundle business model is dead. During Q3 2024, Verizon reported 3M pay-tv subscribers, down from 3.3M a year ago. Meanwhile, the whole industry lost an unbelievable 4 million subscribers in the first half of 2024. As of mid-2024, there are approximately 68M pay-tv subscribers in the US, with some projections forecasting a collapse to 41M by 2028. With its easy-to-use platform and growing content library, YouTube will be one of the main beneficiaries of this decline, with 10s of millions of Americans set to increase their use of YouTube. Similar trends internationally position YouTube to gain 100s of millions of new viewers in the next decade.

Global Growth – YouTube has achieved staggering global adoption levels, with India alone having 476M users. With 2.7B users, one might think that there is not much growth left, but they are wrong. As mentioned in the Search section, global internet adoption is rising, and YouTube will keep gaining those users. The rise of YouTube Shorts and the overall popularity of their mobile app positions them well to gain users in the fast-growing, mobile-first emerging markets of Africa and Asia.

Aging user base – YouTube is especially popular with kids and young adults, with 80% of US parents of kids under 11 saying their child regularly watches it. As these people grow up, their viewing habits change. Instead of watching cartoons and video game streamers, they start to prefer sports, history, and business content. As kids become adults, they start earning their own money, thus making it easier to monetize them. This is why, for instance, the revenues per view of business and history YouTube channels are much higher than for video games. As GenZ and Millennials move up in their careers, their habit of watching YouTube will remain, but their ability to purchase what’s advertised or sign up for YouTube Premium will increase.

YouTube Premium – YouTube ads are annoying, there, I said it. I can’t stand them, and as I watch an ungodly amount of YouTube, I have had Premium for many years. As of 2024, YouTube Premium has an estimated 100M subscribers, less than 4% of its users. As YouTube expands into sports, podcasts, music, and more, the premium offering becomes more attractive. Additionally, as the number of ads shown grows, an increasing number of users will choose to pay to avoid them. I could easily see Premium penetration growing to 10% and more. Furthermore, the price of the service has increased from $9.99 in 2015 to $13.99 today. Overall, YouTube Premium is an amazing way to monetize its most active users! The company generates $168 a year from a single US subscriber, 236% more than the estimated $50 an average ad-supported viewer generates.

4. Waymo

Waymo is Google’s autonomous vehicle venture that is one of the few companies that is not only doing testing but has been allowed to actually service customers!

Founded in 2009, the company raised $5.6B last November at a valuation of $45B! While the service is currently only available in geographically fenced areas in a few warm climate cities such as San Francisco, Phoenix, LA, and Austin, the company is set to expand to Miami, Tokyo, and more by 2026.

Waymo went from 12,000 rides in August of 2023 to 312,000 in August of 2024!

During the Q3 2024 earnings call, Google CEO Sundar Pichai said that Waymo is now driving more than 1 million fully autonomous miles a week. Furthermore, Waymo has an estimated 22% taxi market share in San Francisco. With GM’s Cruise closing its operations and Elon’s Tesla stubbornly sticking to its vision-only approach and refusing to roll out geo-fenced robotaxi operations, Waymo is in a great position to be a market leader in the highly promising robotaxi industry!

Precedence Research forecasts that the global Robotaxi market will grow with a 60% CAGR to reach $189B by 2034!

A 30% market share would enable Waymo to generate close to $60B in sales!

Of course, I can’t tell you with any certainty how big the industry will actually be and Waymo’s position in it, there are too many factors at play. Additionally, it’s hard to estimate the profitability of a mature self-driving business as we don’t know what regulations governments will implement and how fierce the competition will be.

However, what is clear is that with the backing of Google’s $430B balance sheet, Waymo is in a great position to be a significant player!

5. AI and the Break-up

The birth of ChatGPT and OpenAI’s partnership with Microsoft caused many to believe that Google Search is doomed. ChatGPT will quickly release a superior search engine and, together with an improved Bing, will take away Google’s market share. Well 2 years in, we see that Google is still going strong.

Google will not be a victim of AI, it will be one of the largest beneficiaries!

Google has more data to train its AI models with than any other company on earth, it has more money than it knows what to do with and the company is fully cognizant of the rise of AI, and rather than seeing it as a threat it sees it as an opportunity.

Here is why Google will not be the victim of AI:

AI will significantly increase demand for Google Cloud!

AI will reduce content moderation costs on YouTube and make it easier for creators to create videos. Additionally, AI videos will enable small businesses who previously didn’t have the budget for video ads to advertise on YouTube!

AI will reduce operational costs in all segments, improving margins!

AI products and services developed by Google will create new high-margin revenue streams!

Lastly, with the election of Donald Trump, I find it extremely unlikely Google will be broken up. Even if we assume it will, I believe Google trades for a conglomerate discount, and if split, the combined market cap of the separate companies would be higher than Google’s market cap today, thus benefiting the shareholders.

6. Valuation

Currently, the company trades for a TTM P/E of 26, which I find to be low for such a high-quality company. In my valuation model, I forecasted the growth of each Google segment into 2030 and estimated their profitability.

Google only reports the operating profit of its Cloud and Other divisions, so I used the two and my understanding of the remaining segments to estimate their operating margin.

Considering the scale and operating efficiencies, I estimate that Search has an operating margin of 40%. Meanwhile, Google’s reported YouTube Ads revenue is gross revenue before creator payouts. As the company pays out 55% to creators and covers infrastructure and content moderation, I estimate the operating margin to be 20%.

Subscriptions, Platforms, and Devices segment includes YouTube Premium, Google Play Store, and all devices. While the Play Store is likely to be quite profitable, YouTube Premium has similar economics as YouTube ads, meanwhile, Google Pixel, Fitbit, and Chromecast have very low and even negative margins. Overall, I estimate that this unit operates with a 15% operating margin.

Google Network includes AdSense and other 3rd party advertising businesses. This platform helps websites and applications find advertisers, taking a cut of the revenue. While highly profitable, this segment operates in a mature and highly competitive industry. With Google’s operating efficiencies and the reach of the businesses, I estimate the operating margin at around 29%.

While the overall Search Engine market is forecast to grow with a 13.6% CAGR, I find it likely Google will grow with at least an 11% CAGR. As I mentioned in the Search section, Google’s data advantage, the strength of its ecosystem, and its history of innovation position them well for the AI age. I estimate that Search revenues could more than double from 2023 levels to $363B by 2030. Furthermore, I believe that increased economies of scale and AI will deliver even higher operating margins, with an operating income of close to $160B.

Various research analysts expect the global streaming market to grow with around 20% CAGR till 2030. With its huge library of content and increasing popularity with adults, YouTube is likely to continue growing. However, with the legacy media transitioning to streaming and Big Tech increasing their investments, the competition is clearly intensifying. Thus, I could see YouTube growing with a 12% CAGR, slower than the overall industry. In this case, 2030 revenue would be around $70B, while AI and scale will deliver some operational efficiencies, increasing operating profits to $18B.

Google Cloud is the 3^rd largest cloud provider after AWS and Microsoft Azure, and barring any miracles, it will remain so for the foreseeable future. However, I can envision Google reducing the gap. Google Cloud is operating at a smaller base, which makes it easier to grow. Additionally, while AWS and Azure have scale advantages, Google is willing to operate with smaller margins to offer competitive pricing. Moreover, the fact it competes directly with fewer large enterprises than Amazon and Microsoft positions it favorably to gain large customers in certain industries such as retail and SaaS. I estimate a 22% revenue CAGR till 2030, reaching $133B. Furthermore, Google has only recently started posting real profits, and I believe as its scale increases, it will be able to double its operating margin to 30%, below my 40% estimate for AWS. Thus, I could see 2030 operating profits reaching $40B.

Next, the Subscriptions, Platforms, and Devices segment could grow with a 12% CAGR to reach close to $77B in revenue. The popularity of YouTube Premium is growing steadily. Additionally, the Android device base is increasing, enabling higher income from the Play Store. Moreover, while behind Apple and Samsung, Pixel is growing steadily. As this segment grows, I expect the operating margin to increase to 22% due to greater revenues from higher margins subscriptions and platforms. I model a 2030 operating income of $16.8B.

Google Network, while highly profitable, operates in a mature and highly competitive industry. For this reason, I don’t see it being a large contributor to the investment case. I model a 6% CAGR, and I don’t expect margins to improve. Resulting in revenues of $47B and operating profits of $13.6B.

The Other segment is difficult to estimate, so I have decided to leave it flat and assume that losses don’t change. If Waymo or any other bets turn out to be profitable, they might provide additional upside. However, if these ventures fail or losses accelerate, profits could suffer.

Overall, I expect revenues to more than double to $691B, with the operating margin growing from 28.7% to 35.3%, resulting in an operating income of $244B.

Assuming taxes and other operating expenses are 25%, net income could reach $183B.

My assumptions lead me to believe Google has a 107% to 149% upside potential by 2030! A CAGR of 12.9% to 16.4%!

7. Conclusion

In conclusion, with all the great businesses under its umbrella, Google is set to continue being a technology powerhouse!

Thanks to Google’s strong position in search and its continued focus on innovation and AI, the company is likely to keep its leading market share. Meanwhile, YouTube is on a path to becoming the most important media service in the world. Cord cutting, focus on Premium, and continued global growth will supercharge the top line and bottom line.

Furthermore, our digitizing global economies will continue increasing their demand for secure and reliable cloud services, which Google will cheerfully provide.

Most importantly, Google will be a beneficiary of the AI revolution, not the victim!

Lastly, my valuation model shows that Google has a realistic path to a $5.5T valuation by 2030, potentially rewarding patient shareholders with a 16.4% CAGR.

Overall, I find Google to be a high-quality company with huge upside potential and low downside risk.