🗞 Is Google Search Dead?

Happy Sunday!

Here’s what’s on the docket for this week’s newsletter:

• 🔎 Is Google Search Dead?

• ☀️ Enphase Energy: What Now?

Let’s dive in!

Featured Story

Is Google Search Dead?

Google is the most profitable company in the world.

The search giant surpassed Microsoft and Apple in net income over the last 6 months, yet despite being the most profitable company on earth, they are only the 5th largest company by market cap.

Said another way, of all the big tech companies, Alphabet commands the lowest earnings multiple by far.

It isn’t just a preference for peers that’s driving the relative discount either. Many investors believe we are heading towards a future where Google (specifically Search) will be significantly less relevant.

In fact, Coatue Management — a tech focused investment firm with more than $70 billion in AUM — predicted this week that Google won’t even be in the world’s top 40 largest companies by 2030. That implies a roughly 89% drawdown in Alphabet’s market cap over the next 5 years.

The rationale for pessimism appears to be fairly straightforward. “Search” accounts for 56% of Alphabet’s overall revenue and investors fear that consumers are turning to LLMs instead of traditional search.

What does the data say?

Unfortunately, it has been difficult to get a straight answer.

Last month, Apple’s Senior VP of Services stated that “For the first time ever in over 20 — I think we've been at this for 22 years — last month, our search volume actually went down… it's because people are using ChatGPT. They're using Perplexity.”

A day later, in response to Eddy Cue’s testimony, Alphabet released a statement saying “We continue to see overall query growth in Search.”

Seeing as Alphabet doesn’t report overall Search query volume, it’s up to investors to read between the lines.

What is clear however, is that Google is seeing a significant slowdown in “paid clicks” which tends to be somewhat indicative of overall query growth as well.

However, even with Search growth likely slowing down, it’d be tough to really call Google an AI laggard. The company reports that its “AI Overviews” now have 1.5 billion users every month and its latest model appears to have been well received by developers, as active users for AI Studio and Gemini APIs have grown over 200% since the beginning of this year.

Long story short, it’s unclear whether or not Google Search will continue to grow from here. And that uncertainty is leading to a sense of caution among investors.

But the other question investors should be asking is: “Does it matter?”

Alphabet generates $157 billion in annual revenue from its non-Search businesses.

That figure has grown at 17% annually over the last 5 years driven by underlying growth from all segments.

If you believe Search will decline at a single digit percentage rate from here, it’s likely that the remaining divisions in aggregate would offset those revenue declines.

Partner Spotlight: Potential Multibaggers

Enphase: Now What?

Enphase (ENPH) posted its results a while ago, but in the last few weeks, the complete abolishment of solar subsidies has hurt the stock quite a bit. The stock is down 47% year-to-date.

The question I want to answer with this article is whether Enphase is attractive after this drop or one to avoid.

The Numbers

Enphase's revenue came in at $356 M, down 10 % QoQ but up 35% YoY because of the very weak quarter last year. Revenue was 1.64% lower than the consensus. This has become a bad tradition at Enphase since Q2 2023. Seven revenue misses in eight quarters. Ouch.

Revenue appeared to have turned around in the last three quarters, with growth resuming. But this quarter broke that trend again. Revenue is almost similar to that of Q1 2021, four years ago.

EPS came in at $0.68, another miss, as the consensus stood at $0.72. Here too, Enphase's recent track record is not rosy, with 5 misses in the last 8 quarters.

As you can see, the previous quarter was really strong and that spurred optimism, which was already killed again by this quarter.

Gross margin slipped 430 bips QoQ to 48.9 %. Positive is that free cash flow stayed positive at $33.8 M despite a $100 M buy-back and final repayment of 2025 convertible bonds.

Still, it's the lowest FCF but two of the last 21 quarters.

Management guided for Q2 revenue in the range of $340 million to $380 million. At the midpoint, this would translate to an 18.6% revenue growth. Of course, Q2 2024 was a very weak quarter. Most analysts had expected guidance to be around $380, so the lower midpoint of the guidance bracket was seen as another disappointment.

If we dig a bit deeper, we see the KPIs (key performance indicators) of Enphase.

A worrying trend is the dropping megawatts shipped. That had been in an uptrend but dropped again this quarter. Here too, you see that in the current quarter, Enphase could not top the Q4 2020 quarter and the following 13 quarters.