Biggest Risk To Google Right Now is Apple Search
Apple's Opportunity in Google's Antitrust Monopoly Lawsuit
The Justice Department and 38 states and territories have called out Google for being a monopoly and lawsuit is underway.
It makes sense. Google still owns more than 90% of the global search market almost 25 years after it was launched. Google has given zero ground to anyone.
I think this lawsuit can really wreck Google’s search business and therefore, most of its profits. The stock price faces a potential cliff. What I am about to share in this short note is speculative but the risk to Google stockholders is so high that I think it is my responsibility to share this potential bear case outcome. I am net bearish on Google and a more detailed article will follow soon, but this is time sensitive.
Barclays reported that they are 'increasingly concerned' about Google’s prospects in the ongoing lawsuit and that Apple and Google will be forced to terminate their contract and a choice screen will be implemented.
Wells Fargo recently speculated that the antitrust lawsuit “may result in Apple (AAPL) entering into the search market”.
I think the Google/Apple deal is an excellent deal for Apple and a terrible deal for Google. Google pays Apple 36% of Safari search revenue to remain the default search engine (which reportedly came out to be $26.3B in 2021). For reference Apple made 94.7 Billion net profit in FY 2021 - That’s ~28% of Apple’s profit. So if DoJ forces the two companies to terminate that contract, it is good for Google and terrible for Apple in the short term. Apple loses its big pay day but Google will likely lose very little (at first). Google is the best search engine, no one questions that and I think most people will easily pick Google in the choice screen. Making this a net loss for Apple.
But Apple and Tim Cook are also aware of this potential and are likely working towards a solution.
Given the scale of the risk they face, this would be the ideal time to consider launching Apple Search. And that is the case made by Wells Fargo in the article I shared above. Even if Apple’s Search does not take off, giving the risk (losing billions of dollars from Google), it is definitely worth a try. Apple won’t find a better business case to use all that balance sheet strength to finally enter the search market and kill this monopoly.
Here is my rationale: If a choice screen has to be implemented and you are going to ask your users to choose their default search engine, then why not try introducing your own search engine? It is an opportune time, the government is pulling down the #1 and telling others to move ahead in line and take more market share. Why would Apple want to send traffic to Bing or any other search engine? Especially given the fact that they just lost a very profitable arrangement.
If Apple introduces Apple Search, I think over 50% of the Apple users are immediately going to switch to it. America is obsessed with Apple, I wrote a little bit about it in my Apple article. So unlike Bing, Apple will immediately get users and that would be a really bad day for Google and Google share holders.
Google’s Search business is past its peak. I think Google has potential in some other areas like AI, Cloud, Apps, Other bets. So it remains to be seen what happens to Google in the long run but if the choice screen comes into play, Google will likely lose market share over the long term, however if Apple introduces Apple Search before/during the launch of the choice screen, then Google’s market share loss will be a cliff dive. You have been warned.
A lot of people are very bullish on Google but I think it underperforms other mega cap companies.
I have sold ~80% of my Google position over the last 3 years and intend to sell some more. I don’t intend to sell out of my Google position completely but consider this risk management necessary. Google is still my largest position and I intend to bring it in line with my other investments.
I will write a more nuanced article on my take on Google soon. Subscribe to keep up.
Borrowed Conviction Rarely Works
Past performance is no guarantee of future results.
The ideas discussed in this article should not be constituted as investment advice.
I reserve the right to change my mind if the facts change.
Disclosure: We own positions in some/all of the tickers mentioned in this article.