Can ChatGPT help Microsoft (MST) kill Google?

Microsoft (MST) is trying to destroy Alphabet’s Google by adding the ChatGPT AI to its Bing search engine and Edge browser.

“We’re excited to announce the new Bing is running on a new, next-generation OpenAI large language model that is more powerful than ChatGPT and customized specifically for search,” a Microsoft Press release states. “It takes key learnings and advancements from ChatGPT and GPT-3.5 – and it is even faster, more accurate and more capable.”

“We’ve also applied the AI model to our core Bing search ranking engine, which led to the largest jump in relevance in two decades,” Microsoft claims.  “With this AI model, even basic search queries are more accurate and more relevant.”

“These groundbreaking new search experiences are possible because Microsoft has committed to building Azure into an AI supercomputer for the world,” a press release boasts.

Azure OpenAI Service

Microsoft and OpenAI, the private company behind ChatGPT, announced a multiyear and multibillion dollar partnership on 23 January 2023. The partnership’s goals are to develop super-computing at scale and create new AI-powered experiences.

For example, the Azure OpenAI Service makes OpenAI’s GPT 3.5, Codex and DALL•E 2 AI infrastructure available to Microsoft Azure users. For example, those users can access ChatGPT (which they base on GPT 3.5) through Azure OpenAI. Azure is Microsoft’s cloud computing platform.

Hence, Microsoft (MSFT) is now selling AI-as a service (AIaaS). They claim Azure OpenAI can power apps with large scale AI. For example, apps that can answer questions and respond to customers’ needs and requests. They claim to train some AI use cases with trillions of words.

Is Microsoft’s New Bing a threat to Alphabet (GOOG)?

They released the new Bing on 7 February 2023. Bing is the world’s second largest search engine.

However, Bing only powered 3.03% of the world’s searches in January 2023, Statcoutner estimates. In contrast, Google had a 92.9% share of world search engine usage in January 2023.

Conversely, Bing’s market share is bigger in some nations. For example, Bing had a 6.67% share of the US search engine market in January 2023, Statcounter estimates. Bing powers the second-largest US search engine, Yahoo! Which had a 2.73% share in January 2023.

Hence, Microsoft will need to re-engineer Bing to compete with Google. Notably, Microsoft is recreating Bing by adding Artificial Intelligence to it. Conversely, I think it could take several years for Bing to take a large share of Alphabet’s search engine business.

Humans can engage in conversation with the new Bing, The Washington Post reports. Instead of links, the new Bing responds to searches with paragraphs and statements. For example, Bing will respond to the question “who was Adolph Hitler?” with a brief biography of the Fuhrer and a description of his role in history rather than links to history websites.

Interestingly, The Washington Post describes the new Bing as “a personal AI research assistant and a new artificial intelligence chatbot version of Bing.” To explain, a traditional search engine just finds information. The new Bing tries to interpret and describe information.

How Much Money can Alphabet (GOOGL) make from Bing?

Microsoft (MSFT) is adding AI to Bing because of advertising revenues. Dominating search allows Google to generate enormous amounts of advertising revenue.

For example, Google generated $70.16 billion in advertising revenues in the United States in 2022, Statista estimates. Google’s advertising revenue grew from $61.85 billion in 2021 and $44.06 billion in 2020. Statista projects Google’s advertising revenues could grow to $75.94 billion in 2023 and $81.04 billion in 2024.

In contrast, Microsoft generated around $11.59 billion in search advertising revenue in 2022, Statista estimates. Microsoft management hopes to double its advertising revenue to $20 billion, Business Insider reports.

Hence, Microsoft is hoping to steal Alphabet’s advertising cash cow. Skeptics will wonder if this is realistic.

Is Alphabet in danger from Microsoft?

Alphabet (GOOGL) bulls will note that the company’s growth is stalling. For example, Alphabet’s revenues grew by 0.96% in the quarter ending on 31 December 2022.

The revenue growth rate fell from 6.1% on 30 September 2022 and 32.39% on 31 December 2021. Conversely, Alphabet’s quarterly revenues grew from $75.325 billion on 31 December 2021 to $76.048 billion on 31 December 2022.

In contrast, Alphabet’s quarterly gross profit fell from $42.337 billion on 31 December 2021 to $40.706 billion on 31 December 2022. Similarly, the quarterly operating income fell from $21.885 billion on 31 December 2021 to $18.16 billion on 31 December 2022.

Hence, Microsoft’s challenge could come at a terrible time for Alphabet (GOOG). Profits, income, and growth are down.

How Much Cash is Alphabet (GOOGL) Generating?

Value investors like Alphabet (GOOGL) because it is a cash-rich company. Alphabet is cash rich because of the income Google and YouTube generate.

Alphabet is generating less cash. For example, the quarterly operating cash flow fell from $24.934 billion on 31 December 2021 to $23.614 billion on 31 December 2022. Conversely, the quarterly ending cash flow grew from -$2.774 billion on 31 December 2021 to -$105 million on 31 December 2022.

Notably, the quarterly ending cash flow shot up to $20.886 billion on 31 March 2022 and $4.048 billion on 30 September 2022. Thus, Alphabet can generate amounts of cash.

Yet Alphabet has less cash. Its cash and short-term investments fell from $139.649 billion on 31 December 2021 to $113.762 billion on 31 December 2022.

One reason Alphabet has less cash is the enormous amount of debt it pays. It reported a quarterly financing cash flow of -$17.629 billion on 31 December 2022. That means Alphabet paid $17.629 billion in debt. The quarterly financing cash flow grew from -$16.311 billion on 31 December 2021.

Yes Alphabet is a Value Investment

Appealingly, Alphabet’s total debt fell from $17.119 billion on 31 December 2021 to $14.701 billion on 31 December 2022. Thus, Alphabet (GOOG) is a cash-rich company with small debts.

I think that makes Alphabet a value investment at the $94.57 Mr. Market paid for it on 10 February 2023. Alphabet’s share price fell from $141.59 on 9 February 2022.

I consider Alphabet a value investment because of its growing value. For example, Alphabet’s Total Assets grew from $171.125 billion on 31 December 2021 to $200.469 billion on 31 December 2022.

However, Alphabet is having a hard time keeping up with Microsoft and ChatGPI. Alphabet’s answer to ChatGPI, Bard made factual errors at its public debut, Investopedia reports. The errors caused Alphabet’s Market Cap to fall by 8%.

It sounds as if Alphabet rushed Bard out to counter the hype about Microsoft and ChatGPI. However, I think Alphabet will keep adding cash and value for the foreseeable future.

Alphabet (GOOGL) is still a value despite the potential of ChatGPT and GPT-3.5 because it can still generate enormous amounts of revenue from search and advertising. I consider Alphabet a value investment. It will take several years for Microsoft to monetize OpenAI’s language models. Hence, Alphabet will preserve its lead in search and make money from advertising for years to come.