Monet Stuff
Imagine Clayton Christensen writing The Innovator's Dilemma today. The gist of the book goes like this: a market leader achieved its crown through innovation. Since getting there, it relies on small improvements to its please its customers. It improves performance or quality or adds features. It "innovates." Things get a little better. But that incrementalism keeps it from the Next Big Thing.
Someone else — from some niche or small corner of the market and without the massive, market-leading customer base — INNOVATES. It changes the lines of competition. It changes what customers want. It's a hit. The newcomer takes the crown. The market leader fades.
The incumbent faces the dilemma that conventional metrics drive performance. Those metrics never lead to the conclusion "disrupt your business." Disruption to this arrangement comes from outside.
Clayton's dilemma would be who to use to make this point. The original used Kodak's whiff on digital photography and mainframe makers missing the shift to hard disk drives. A few contemporary candidates jump to mind.
CC might ask "what about Apple?"
They haven't had a blockbuster product in a while. Topline growth has plateaued. But they haven't been "disrupted" yet.
Clayton: "What about Amazon?"
There are a few challengers — Walmart. But they’re still competing along the same lines. Amazon’s still dominant. Still market leading. Still posting solid results.
Clayton: "What about Google?"
Well…
Searching for answers
Google's been dominant in search for more than two decades — a position it won through innovation. It's printed money from advertising that entire time. Then, in 2022, OpenAI launched ChatGPT.
Instead of offering up blue links that you could then spend time exploring to find whatever you were looking for, it gave you an answer. Not all the answers were great or even real. Some are still way off. But they're getting better. And it's really easy to use.
There's less room for advertising in that model. And Google wasn't the one providing the results.
ChatGPT hit one million users within five days. It hit over 200 million by the end of 2024. Google has a decent Large Language Model AI suite. It has loads of AI products. ChatGPT is still eating Google’s lunch.
So, Google is toast?
In the three years before ChatGPT launched, Google's search business grew at a 13% per year clip. Since then, it’s cratered to… well, its still growing 10% per year.
Wait. That doesn't seem so bad.
It’s not. The pop-finance take that Chatbots and LLMs are killing search isn’t playing out the way the market’s feared. LLMs have disrupted search, but most of what they've disrupted has been stuff Google doesn't make money on anyway. "Write a freshman-level analysis of how Jane Austin's Emma offered warnings about the pitfalls of digital matchmaking services like Bumble" — that query doesn't have any bidders for ads. A search for "tartan miniskirt" yields plenty of search results and ads. LLMs don't add much to that, though.
Paint me a picture
Writer Sam Ro used the classic 1995 film Clueless to describe financial markets: "she's a full-on Monet. It's like a painting, see? From far away, it's OK, but up close, it's a big old mess." Same goes for Google. If you look closely, it’s losing search queries to LLMs. This scares investors. But when you step back, the search+ads picture is still pretty. Its other businesses are humming too: YouTube is taking over living rooms. It's cloud business is at capacity.
Investors don’t expect much from it though. It's priced below the market. The story that it might be losing its grip on search has a hold on them. Despite two and a half years since “disruption,” investors haven't taken to the perspective — so far — that it’s been business as usual. The space between investors glum expectations and Google’s solid performance opens the opportunity for an attractive investment.
Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.