Transcript: AI: ‘Google is the adult in the room,’ adviser says
Check Capital Management Managing Director Chris Ballard joins Yahoo Finance Live to discuss Alphabet earnings, investor sentiment, Google’s search dominance, and the outlook for AI.
Video Transcript
Interviewer - Yahoo Finance
And turning to our top story now, getting into Google, Alphabet highlighting its cloud division in its earnings report, but investors considering if its cloud unit stands alone or if Google's worth more as the sum of its parts. Joining us now is a key investor, Chris Ballard, managing director at Check Capital Management, who holds the shares. Chris, thanks for being here.
So when we look at the different parts of Alphabet here, Search beating estimates but falling back a little bit, right? Cloud, it looks like for both Alphabet and Microsoft, doing a little bit better than estimated. What do you think is the most valuable part of Alphabet right now?
Chris Ballard
Well, right now the Cloud business is fabulous. They did about 26%, 28% year-over-year versus the other quarter. And that's on the back of 44% growth last year for the same quarter. So they're really knocking it out of the park with the Cloud. And we expect that to continue going forward.
Search, obviously, is their big behemoth, right? About $40 billion of the revenue comes from Search, $40 billion of, let's say, the roughly $70 billion that they reported last quarter. So the fact that that's still growing and in a somewhat softening economy was a definite positive for us as well.
Interviewer - Yahoo Finance
We've talked a little bit about YouTube here this morning as well and how that business is doing. It looks like it is seeing a little bit of improvement there. Do you think that is one of the secret weapons, if you will, over the longer term for Alphabet?
Chris Ballard
Oh, absolutely. So yeah, Alphabet bought YouTube in about 2006 for roughly $1.7 billion. They did over $7 billion of revenue last quarter. We think they're going to continue to grow quite rapidly as time goes on.
The year-over-year comparisons are a little bit difficult right now because when everybody was staying at home and constantly looking at their phones and doing things on their phones, the pandemic really pulled forward a lot of numbers related to the likes of YouTube. So it slowed a little bit last quarter. And also they're starting to emphasize a little bit of these YouTube Shorts to compete against TikTok and that sort of thing.
But we think that over time, Alphabet's going to continue to approach this the right way. And we very much see YouTube as a valuable asset. I think it's about 25% of all internet searches these days actually are run through YouTube.
Interviewer - Yahoo Finance
Chris, a lot of the discussion lately around Alphabet has been around AI, right, and the seeming market perception that Microsoft is out ahead on this issue and could even start to chip away at Google's search dominance. As an investor in Alphabet, how concerned are you about that issue?
Chris Ballard
Yeah, so Google has a huge moat, right? And so the notion that their 97% or 98% search share could get chipped into 0.08% month-over-month when ChatGPT was introduced, it has a lot of people fearful. And Google's price fell off something like $80 billion in value when ChatGPT was first launched. And Satya Nadella, CEO of Microsoft, basically told Google, let's dance.
We really think that Google is the adult in the room on this. They've been very conservative with how they want to approach their artificial intelligence. For the last couple of few years, they've had the ability to roll out their own artificial intelligence. And they decided not to in the way that Microsoft or, let's say, OpenAI and ChatGPT is.
There's a lot of indications at this point in time that-- there's hallucinations, for instance, that happen with artificial intelligence if you ask it for more than a few questions in a row. And so there's a lot of call for that to be pulled back and slowed down. So, at the end of the day, we think that Alphabet has a long-term great position in this space. And they will do very well over the long haul.
They're just choosing to be more conservative, where others right now are choosing to go ahead and introduce artificial intelligence. And it's a big talking point. It's really fun to talk about right now. But we definitely think they're going to be a leader in this space. And it's going to be here to stay, for sure.
Interviewer - Yahoo Finance
Well, and there's also how much these various companies are spending on it. And with that, I want to turn to expenses at Alphabet, which, of course, like many of its large-cap tech peers, has been cutting back on expenses, has been cutting people. Where are we in that process? Do you think that we're going to see more layoffs, for example, at Alphabet before the year is done?
Chris Ballard
Sure. Yeah, no, expenses have been very high at Alphabet, too high, in our opinion. We think that they should be making some great changes. I think this time last year, there was a period in time where they had done a hiring spree, where they had about 20% more employees year-over-year.
They slowed down on that hiring spree. And, obviously, as you know, they started laying off some folks. They laid off about 6% of their workforce relatively recently.
So with regard to that, there's going to be some tailwinds going forward, where they have some one-time expenses that are showing up on their earnings, where they would be-- their earnings, for instance, was down year-over-year about 5%, where their revenues were up. But if you were to take out some of these one-time expenses, their earnings would have been up about 10% or so year-over-year.
But they're going to continue to spend on CapEx and research and development. It's a very important aspect of what they do. We want them to do that. They have a tremendous amount of free cash flow coming to them and $133 billion in the bank.
So they're taking all that cash flow. And they're buying more shares of stock. And we think they're doing basically the right thing at this point.
But we weren't happy with how some of the expenses were going in the past. But they will continue to have quite the runway of expenses. I think they had about $11 billion in expenses this past quarter on research and development.
Interviewer - Yahoo Finance
And just to put a fine point on one thing you said, especially since we're going to be having a buyback discussion in just a minute, so you're happy that they are deploying capital to buy back their own shares?
Chris Ballard
We are. Yes. We are very happy that they are. We think it's a very good thing. It needs to be done in a responsible manner. And they're doing it in a very responsible manner.
So they accelerated their buybacks last year when their stock price came down. And that's a very important aspect of buybacks. You want to buy when prices are low. And as a long-term shareholder, right, they're buying back at a rate of about-- they'll but back about 5% of their outstanding shares over the course of a year. And so without doing anything, we've become 5% more of an owner in their business.
But yeah, they bought back about $14 to $15 billion over the last couple of quarters. With their newest announcement of $70 billion of buybacks in the coming year being authorized, we think that pace will continue. And as long as they continue to do it when the price is down, like it is right now, we think it's the right thing to do for long-term shareholders.
Interviewer - Yahoo Finance
Chris, thanks for your perspective. Chris Ballard, managing director at Check Capital Management and an Alphabet shareholder. Thanks you.
Chris Ballard
Thanks for having me, Julie.
Interviewer - Yahoo Finance
Thanks.