Google’s Search and Other revenue (59% of total revenue) accelerated to 14.4% y/y in Mar-24, ahead of the consensus of 11%, and up from 12.7% in Dec-23.  One key investor concern is the impact of AI on Search. Sundar Pichai said they are seeing early confirmation that new Search Generative Experiences (SGE) are expanding the number of searches, and they are “managing the monetization transition” away from static search to dynamic generative search. He added, “There are questions about monetization. And based on our testing so far, I’m comfortable and confident that we’ll be able to manage the monetization transition well.”

As for the cost of these AI-powered searches, Sundar said, “we are very, very confident we can manage the cost of how to serve these queries.”

My take: The early data on the monetization of generative search and its cost is encouraging.

Google Cloud (GCP), which accounts for about 11% of sales, was up 29% y/y in the March quarter, ahead of consensus up 25%, and up from 26% in Dec-23. Sundar mentioned they expect YouTube and Cloud to exit 2024 at a combined annual run rate of over $100B. This means Google Cloud will grow at least 25% per quarter through the end of the year. I estimate GPC will grow faster than YouTube in the next three quarters, which suggests GPC’s growth rate will remain in the high 20s for the balance of 2024.

My take: Both GCP and Microsoft’s Azure are seeing their growth rates accelerate as more companies move compute infrastructure to the cloud to best leverage AI models. We’re still early in this transition given Deepwater estimates less than 15% of corporate compute is in the cloud today.

Google is all in on making the long-term investments to power generative AI. The company reported capex for the March quarter increased 91% y/y, 21% higher than expectations. Unlike the reaction to Meta’s higher-than-expected capex outlook, Google investors have supported the step up in investment. Going forward, the company expects Capex will be stable throughout 2024.

My take: One key investor concern about Google is the company is moving too slowly in building out its AI infrastructure and models. The current 2024 plan that calls for capex to be up about 75% over 2023 underscores the company’s aggressiveness in building out its AI infrastructure. As for the models, debate remains if they are going fast enough or keeping too many restrictions on what the models can do.

Despite the continued step-up in investments noted above, Google expects operating margins to increase by about 2% in 2024.

My take: I was not expecting margins to increase this year. Microsoft had similar commentary to expect their margins to increase by about 1% in 2024 and decline by about 2% in 2025. While Google did not discuss 2025, my expectation is that margins will remain flat as the company continues to invest.

Big picture: Google is on track to expand and maintain its margins during this multi-year investment phase, which is testimony to the long-term ROI potential around generative AI. Imagine what will happen to margins once the build-out phase scales back.

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