Episode summary
Alphabet should split its search business from its cloud business, says D.A. Davidson's Gil Luria
Summary
Alphabet’s earnings renewed the debate over whether AI is structurally weakening Google Search. Gil Luria said the quarter showed the feared inflection point: search ads decelerated abruptly, profitability came in lighter than expected, and investors are now confronting the possibility that chatbot-based discovery is cannibalizing the old search model. He argued that the shift from keyword search to AI chat makes monetization harder because commercial queries may start inside chatbots instead of Google’s ad-driven search pages.
Luria contrasted that pressure with Alphabet’s cloud business, which he described as a separate, fast-growing asset that doubled in size and deserves a much higher valuation. He said the cloud operation has little ancillary benefit to ads, can be managed independently, and could command a 30 to 40 times multiple if separated from the slower search-ad business. That led him to openly support a breakup of Alphabet, saying investors should not penalize the AI and cloud business for being attached to a declining search franchise.
He also distinguished Alphabet from other AI-heavy companies, arguing the thesis is company-specific rather than a read-through for the whole tech sector. Microsoft’s stronger Azure growth was mentioned as part of the broader AI spend backdrop, but the main message was that Alphabet’s problem is the erosion of search economics, not simply a generalized weakness in digital advertising.
Key takeaways
- Gil Luria said Alphabet’s quarter looked like the feared turning point, with search ads decelerating abruptly and profitability missing expectations.
- Luria argued chatbot adoption is shifting commercial queries away from Google, making ads harder to sell in the highest-value searches.
- He said Google Cloud is a separate, highly profitable business that doubled and could deserve a 30 to 40 times multiple on its own.
- Luria said Alphabet should consider a breakup because the cloud business is being dragged down by a declining search-ad business.
- He distinguished Alphabet’s issues from the broader tech sector, saying the problem is specific to Google’s search model.
- He said Waymo is different from cloud because it still needs capital and is better suited to stay attached to cash flow.
Notable quotes
“THIS IS A QUARTER WHERE ALL OF A SUDDEN, HEY, WAIT A SECOND. MAYBE THE CHANGE IN BEHAVIOR TO AI IS IS RUINING THIS GOOSE THAT LAYS THE GOLDEN EGGS FOR GOOGLE”
“THE INTERNET IS NOW BEING USED BY CHAT BOTS MORE THAN BY HUMANS. AND IT'S VERY HARD TO SELL A CHAT BOT, AN AD”
“THERE ARE CHALLENGES THAT THEY'RE GOING FROM 90% SHARE IN SEARCH TO A LOT LESS THAN THAT”
“I AM, AND I HAVE BEEN, AND THAT'S SOMETHING THAT WHEN THE STOCK WAS TRADING AT 30 TIMES EARNINGS, NOBODY WAS REALLY THINKING ABOUT”
How the episode opens
Remember his name last time because he sounds like an old pirate mazurowski I think I remember remember mazeroski? Yeah, but he's tough. 4 to 1.
Magnificent seven. Earnings in focus. Specifically Microsoft and Alphabet.
Alphabet shares are falling after google's parent company reported negative free cash flow worse than people thought. $9 billion for the quarter because they're spending so much. For its part, Microsoft beat expectations across the board, with azure growing faster than expected.
Joining us now on all of this and the ai spending story, Gil Luria, d.a. Davidson head of technology research. It's really I'd like to do tops down, but it's really bottoms up.
It's it's what we see with Alphabet isn't necessarily what we're going to see with other tech names.
That's exactly right. Alphabet has been google has been generating most of its profits from google search ads for the longest time. It's been one of the best businesses ever constructed.
And over the last few years, we've had this fear of what happens when we stop searching and we start using chats. And for the last couple of years, google has actually been fine and investors have become complacent. But this is the quarter that we feared.
This is a quarter where all of a sudden, hey, wait a second. Maybe the change in behavior to ai is is ruining this goose that lays the golden eggs for google. There was an abrupt deceleration in google search ads and a couple of other businesses.
Lower profitability than expected. Probably the biggest miss they've had in years. And so investors are very concerned about what's going to happen to this business in the future.
The internet's been flipped over. The internet is now being used by chat bots more than by humans.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- alphabet earnings
- microsoft earnings
- ai chatbots impact
- search business
- cloud business
Companies and tickers mentioned
- GOOGL
- GOOG
- MSFT
- Alphabet
- Microsoft
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Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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