Sacks said that investors may be reading too much into Google Search’s share in Alphabet’s overall revenue dropping below the 50% level.
- Sacks said that a falling percentage of Google Search’s share in Alphabet’s total revenue does not necessarily mean that the underlying business is shrinking.
- The bigger reason Search now represents less than half of Alphabet’s revenue, according to Sacks, is that the company’s other businesses are growing much faster.
- Sacks sees revenue diversification as a positive development for Alphabet, rather than evidence that the company is losing its most important business.
Alphabet Inc. (GOOG, GOOGL) shares suffered their worst-ever one-day decline last week, wiping out nearly $500 billion in market value after investors reacted to disappointing Google Search growth and the business falling below half of the company’s total revenue for the first time.
This has fueled fresh concerns that artificial intelligence could be eating into Google’s search dominance. But David Sacks, co-host of the All-In podcast, says investors may be reading too much into the headline.
Alphabet’s Class A shares closed 1% lower in Friday’s regular trading session, but edged up by 0.6% during the after-hours session.
Sacks Highlights Growth In Google Search
Sacks pushed back on the idea that Google Search’s falling share of Alphabet’s revenue automatically means the business is deteriorating.
“I’m seeing people post that Alphabet’s Google Search revenue dropped below 50% of total revenue for the first time and they’re making it sound like that’s a catastrophic situation,” Sacks said.
Google Search & other revenue rose 12% year over year to $63.35 billion in the third quarter, up from $56.57 billion a year earlier.
Google’s Search business still generated roughly $6.8 billion more revenue than it did a year earlier, even as its contribution to the company’s overall revenue mix declined to about 49.7%.
“It’s true that Google Search’s relative share decreased, but its absolute revenue still increased,” Sacks said, while adding that the shrinking percentage of total revenue does not necessarily mean that the underlying business is shrinking.
“Google Search is still thriving. I think you could say it’s not growing that fast relative to other businesses, but you’re not seeing it deteriorate yet,” he added.
Google Cloud Is Changing The Math, Says Sacks
The bigger reason Search now represents less than half of Alphabet’s revenue, according to Sacks, is that the company’s other businesses are growing much faster.
Google Cloud revenue more than doubled year over year to $30.7 billion in the third quarter, fueled by demand for AI infrastructure, enterprise AI solutions and core cloud services.
“And again, the reason why the share fell below 50% is because other Alphabet businesses are simply growing much faster,” Sacks said.
He pointed specifically to Cloud’s surge, arguing that its rapid expansion has made Search’s declining revenue share look worse than the underlying numbers suggest.
“So, it’s the rise of the Google Cloud business that has made Google search seem like it’s on the decline,” Sacks said.
He sees that diversification as a positive development for Alphabet, rather than evidence that the company is losing its most important business.
Google Says AI Is Actually Driving Search Growth
Alphabet itself pushed back on the idea that AI is undermining Search, pointing to usage as evidence that the opposite may be happening.
“Our AI investments are driving overall Search query growth, including commercial queries,” CEO Sundar Pichai said during a post-earnings call, noting that year-over-year query growth was the highest in five years.
Pichai also said Google is treating AI-powered Search as an expansion opportunity, with users asking longer, more personalized and multimodal questions. Queries in AI Mode are now three times longer than traditional searches, while more than 50 billion visual searches are conducted each month.
The company acknowledged that AI Mode is currently less monetized than traditional Search, which contributed to the slower 12% Search revenue growth. But Google said it is now scaling ads across AI Overviews and AI Mode.
“We are now scaling high-quality ads within AI Overviews and AI Mode to more users and queries,” Chief Business Officer Philipp Schindler said.
What Retail Investors Think Of GOOGL Stock
Retail sentiment on Stocktwits around Alphabet trended in the ‘extremely bullish’ territory at the time of writing.
GOOGL stock is down 11% year-to-date and 1% over the past 12 months. The S&P 500 ETF (SPY) is up 11% over the past 12 months, while the Invesco QQQ Trust (QQQ) is up 12%.
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