BKNG - Google Introduces A Differentiated GTM Strategy For Generative AI

2023-06-08 10:42:29 ET

Summary

• Google Cloud has introduced "Google Cloud Consulting" to further complement the go-to-market strategy for its growing slate of generative AI solutions.
• This marks Google's latest development in the heated AI arms race among hyperscale cloud providers in recent months.
• The following analysis will explore the implications of Google Cloud Consulting on the fundamentals of both Google Cloud and the broader company and gauge their impact on the stock's prospects.

Alphabet Inc. ( GOOG / GOOGL ) aka Google has introduced its latest move to deepen its reach within the increasingly competitive generative AI market. Its cloud platform unveiled Google Cloud Consulting for generative AI this week to better assist businesses looking to take advantage of the new technology but do not know where / how to start. The development adds to Google Cloud Platform's rapid expansion of its generative AI capabilities in recent months to keep up with rising competition, and penetrate new market opportunities as its "core search business matures."

In one of our previous coverages on the stock, we highlighted how GCP, despite being in distant third place in terms of its market share size in public cloud-computing services, would likely be a key beneficiary from growing end-market demand for cloud spend optimization and adoption of multi-cloud strategies.

Specifically, recent [third-party] data shows that spending intentions for Azure [MSFT] and GCP are on the rise, as corporates turn to a multi-cloud strategy for benefits that include "risk mitigation, reliability/redundancy, multi-function availability, and mostly importantly, cost-efficiencies"… In a recent sentiment check survey performed by RBC Capital Markets, about 57% of corporates looking to ramp up investments in cloud have noted AWS [AMZN] as a potential beneficiary over the next 12 months, compared with 73% for GCP and 71% for Azure.

Source : "Is Amazon a Buy After Q3 2022 Earnings? The Cloud is Dissipating."

And the segment's recent introduction of consulting services focused on furthering user implementation of its generative AI offerings will likely reinforce its accelerating pace of cloud market share gains, especially considering the anticipated cloud total addressable market, or TAM, expansion driven by the nascent technology's incremental demand for high-performance computing capacity. However, we remain incrementally cautious in the near-term given the newly introduced consulting services would likely drive incremental pressure to GCP's margin expansion efforts and risk durability to the segment's profitability observed in the first quarter.

Google Cloud Consulting's Implications on Growth in the Heated AI Arms Race

Earlier this week, GCP has added consulting services to its rapidly expanding roster of cloud-computing services and solutions - particularly with regards to generative AI. Recognizing the rapidly revolving landscape in generative AI, and the myriad of related solutions mass marketed over the short span of six months since ChatGPT's debut, Google Cloud Consulting aims to help businesses navigate through the overwhelming, yet critical transformational changes.

The new services would encompass a series of free informative materials on generative AI for existing and prospective customers, and a suite of "four new generation AI consulting offerings":

• Create with Generative AI : The service primarily targets organizations' "creativity and productivity" needs, equipping them with generative AI tools within GCP that can help with "[building] content faster for creative management at scale." This includes implementation of generative AI tools that can quickly turn simple text prompts into multimodal content spanning images, videos, comprehensive written responses, and even lines of code. Create with Generative AI is likely to bolster GCP's penetration into the nascent technology's productivity use cases, and capitalize on opportunities stemming from an ever-expanding talent gap. Recent research data shows that "novice workers benefited most from [the assistance of AI]", with the technology improving performance by as much as 35% , while more than 40% of enterprise environments have identified no- to low-code solutions as key productivity drivers in the data-first era, underscoring the market opportunity present for GCP to further capitalize on via the Create consulting offering.
• Automate with Generative AI : Create with Generative AI also complements Automate with Generative AI. Specifically, Automate with Generative AI consulting services aims at further addressing growing enterprise users' demands for optimization - not just in response to currently uncertain macroeconomic conditions, but rather a structural reprioritization of IT spending strategies. Automate with Generative AI consulting services will help enterprise users identify and implement generative AI tools for turning "time-consuming, expensive business processes to consistently efficient, cost-effective ones". This includes identifying adequate generative AI-enabled automation solutions and recommendation systems to help business users address recurring and tedious processes more efficiently, leaving more time and capital for additional value-add tasks.

93% of organizations say it has become more difficult to retain skilled developers… 91% of organizations say automation solutions can help developers do more with less.

Source : "New Research Shows How to Keep Developers Happy Amid the 'Great Resignation.'"

• Discover with Generative AI : The Discover with Generative AI consulting services aims at helping business users identify the right tools to make better sense of increasing data troves in the digital era and drive greater value out of existing resources within the organization. This includes implementing generative AI solutions that can help businesses "dive into the data and pull actionable insights, easily and intuitively." The consulting service effectively reinforces GCP's role in addressing generative AI opportunities stemming from data inefficiencies in the workplace - only 4% of companies claim to have a "highly sophisticated approach to leveraging data," leaving a sizable addressable market within the corporate environment for GCP's Discover generative AI tools to take advantage of.
• Summarize with Generative AI : Summarize with Generative AI aims to equipping business users with tools to unlock relevant information "in less time for faster decision-making." Summarize with Generative AI complements Discover with Generative AI by helping organizations better drive value out of rapidly expanding volumes of data and content, and optimize efficiency.

Google Cloud Consulting services for generative AI has already garnered robust reception from various industries, spanning financial services, healthcare, transport, food, and leisure. Reputable names like Deutsche Bank ( DB ), Uber ( UBER ), Wendy's ( WEN ), Mayo Clinic , and Priceline ( BKNG ) have already adopted Google Cloud Consulting services to help their stakeholders (e.g., employees, developers, researchers, and customers) optimize the use of already implemented generative AI tools in the workplace, and identify new ways the nascent technology can further improve efficiency, performance and productivity.

The latest development is expected to further bolster the go-to-market strategy for GCP's growing slate of purpose-driven, industry-specific generative AI solutions within the increasingly competitive landscape. Recent research from Bloomberg Intelligence highlights as much as $1.3 trillion worth of growth opportunities stemming from the advent of generative AI, with "demand for infrastructure needed to train AI models" - such as public hyperscale cloud providers like GCP - to be a main driver in related spending estimated at "$247 billion by 2032." And GCP's recent launch of Google Cloud Consulting services are expected to deepen its share in the anticipated growth opportunities stemming from the advent of generative AI by expanding its reach into adjacent services such as "AI-assisted digital ads [and] AI servers," which will collectively drive revenues of more than $300 billion by 2032.

While GCP has introduced a myriad of generative AI solutions spanning its own Bard chatbot, a large language model marketplace , and in-house data center processors aimed at accommodating related computing capacity requirements to match offerings at major rivals counting Amazon's AWS and Microsoft Azure, we believe Google Consulting Services is proprietary to what is currently available at the rival hyperscale cloud providers for capitalizing on the emerging technology trend. Instead of offering in-house AI consulting services, much of the relevant professional services offered on AWS and Azure stems from third-party providers on its cloud marketplace. This gives Google Consulting Services an advantage in offering a more tailored approach to existing and prospective GCP customers looking to further integrate generative AI into their IT infrastructures and digital fabric, and complement incremental growth opportunities stemming from optimization and multi-cloud adoption trends, enabling greater market share gains.

Google Cloud Consulting's Implications on Profitability in the Heated AI Arms Race

Recall that GCP has been on a cost optimization spree, achieving breakeven in the first quarter from losses spanning more than $700 million a year ago and $480 million just a quarter ago. Continued scale realized over the past two quarters, with solid double-digit growth that has assuaged concerns of stark deceleration observed at rival cloud providers due to the combination of transient macroeconomic challenges and a more structural shift in end-market cloud adoption preferences, have also been key to the segment's profitability eked out in the first quarter.

But consulting services typically come at low - or even negative - margin given the requirement to tailor solutions for addressing customer-specific needs, which are less scalable. With GCP's slim operating margin at 2.6% during the first quarter, it leaves little room for absorbing the incremental costs of supporting Google Cloud Consulting. This essentially puts GCP's aspirations for driving sustained profitable growth at risk in the near-term, keeping us incrementally cautious on how the segment plans to balance the incremental costs of Google Cloud Consulting with aims for greater value-add through improving adoption of higher-margin generative AI solutions.

A tip back into the negatives for GCP's bottom-line would also bode unfavorably for the broader company's fundamental performance, as consolidated profit margins have been deteriorating (1Q22: 30% vs. 1Q23: 25%) in recent quarters due to macro-driven deceleration in Google's core advertising business, as well as other one-time outlays stemming from workforce reductions and office space consolidation. This would likely dull Google's appeal to investors in search for tech haven investments amid looming recession risks, a potential near-term downside risk to the stock.

…market participants surveyed said the highest returns this year would come from buying quality stocks focused on profitability…Investors are entering a new month with little clarity on interest rates and the economy. That's boosting the appeal of stocks with robust cash flows and promising revenue growth, even if they come with hefty price tags.

Source: Bloomberg News .

The Bottom Line

The introduction of Google Cloud Consulting for generative AI will likely differentiate Google's go-to-market strategy within the increasingly competitive arms race in the emerging tech trend, and bolster investors' confidence in the tech giant's positioning within the budding market opportunity. Yet, the near-term costs of the foray on GCP's bottom-line performance might also risk dampening sentiment on the quality of Google's earnings margin, which has been struggling to stem a decline over the past 12 months. Under the current market climate where investors continue to crave for profitable growth amid looming recession risks and broader macroeconomic uncertainties, any anticipated challenges to Google's bottom-line could potentially set the stock back on its latest "flight to safety" driven rally.

However, the potential impact on GCP's profitability from Google Cloud Consulting will likely be transient, as ensuing results are expected to drive further durability and scale in the adoption of the company's higher margin generative AI and related cloud-computing solutions over the longer-term. This means any pullback in the stock driven by near-term margin deterioration could be an opportune time to build positions in Google.

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