Hello, this is Namu. Today, I will talk about a topic that is quite familiar to all of you: Google. The publicly traded company is Alphabet, which is Google's parent company. There are three types of stocks: A, B, and C. The ones that are publicly traded are the A-type stocks, represented by GOOGL, and the C-type stocks, represented by GOOG. There isn't a significant difference between the two, although there is a difference in voting rights. The B-class stocks are held by the founders and executives, so they are not traded.

However, Google's valuation, expressed in terms of price-to-earnings ratio, is the best among the big tech companies. This is somewhat surprising because Google is said to have the best IT talent in the world, including software engineers and scientists. Google is considered one of the hardest companies to get into for IT professionals, and its brand is outstanding. When you think of Google, it gives you a sense of supremacy. But how...

Valuation is at its lowest, and there are reasons for this that are somewhat similar to the recent issues faced by Samsung Electronics, so I think it would be good for us to take a closer look. First, I have created a simple table to evaluate the valuations and stock prices of our big tech companies. 

So, the first is market capitalization, which can be compared to the selling price of an apartment. Next, we look at how much the stock price has increased over the past ten months this year. Then we examine the price-to-earnings ratio (P/E ratio). As we enter October, we estimate this year's earnings and next year's earnings, along with the average earnings estimates for 2024 and 2025. This means we are looking at the multiple in relation to the expected earnings over the next 12 months. 

If we compare it to apartment prices, this could be 30 million won, 40 million won, 50 million won, or 100 million won. The higher the P/E ratio, the higher the growth potential, earnings stability, and earnings quality are typically.

Governance is said to be good, but Google has a market capitalization of 2.1 trillion won, which places it in the middle among the seven big tech companies. Apple, Microsoft, and Nvidia are in the 3 trillion won range, and right below them, there's Alphabet, which is significantly lower. Amazon and Meta are closing in, with their valuations approaching 2 trillion won. Alphabet's stock does not fluctuate as much; it tends to be somewhat defensive, showing a steady increase compared to the other big tech stocks. What I want to emphasize is that Alphabet has the lowest price-to-earnings (P/E) ratio at 20 times. Previously, Meta's valuation was much lower than Alphabet's, but Meta has risen significantly. Apple, Microsoft, Nvidia, and even Amazon have P/E ratios exceeding 30 times.

Before, the price-to-earnings ratio was about 5 to 6 times, but before COVID-19, it has now stabilized at around 35 times. Tesla, on the other hand, has a high P/E ratio due to strong expectations for its future. So, when we look at Alphabet, one might wonder why its P/E ratio is so low, which could lead to concerns about its growth potential. A significant part of its growth relies on digital online advertising, which comes with volatility. Additionally, in this era of AI, there may be a concern that its competitiveness is declining. It seems that the employees are too comfortable in such a good company, lacking a bit of that hungry mentality. In that sense, it is somewhat similar to Samsung Electronics. I will identify three reasons for this. The first is that Alphabet, or Google, earns most of its revenue from the advertising search market, and competition there is becoming incredibly fierce. If we look solely at the U.S. market, just six years ago...

In 2018, when you searched for advertisements, ads would appear. At that time, Microsoft had a market share of 60%, but it seems that this year it will drop below 50%, and next year it may fall to around 40%. In the United States, the advertising search market is worth about $300 billion, which is roughly 400 trillion won. So, where is the growth happening? Amazon is currently making significant strides. For several years now, younger people in the U.S. have tended to search for products on Amazon rather than Google. We can see a similar trend here, as we don't search much on Coupang lately; it's the same situation. Microsoft is also making progress, and Amazon's market share is now exceeding 10% to 20%. Essentially, Amazon has captured the portion of the market that Google and Microsoft are losing. Furthermore, recently, there has been a growing focus on advertising in ticket sales, which is very popular among young people, and AI companies are opening up.

AI, Anthropic, and others are now emerging, and in terms of search, this is a part that generates immense profits. They are pushing into this area, threatening Google's stronghold. From Google's perspective, if we look at the recent second-quarter results, we cannot precisely determine the profitability margin of Google Search. Overall, the operating profit margin is around the low 30% range, and when we consider just the search part along with YouTube and other advertising sectors, the profitability is about 40%. However, if we look at search alone, we might see profits around 50%. This means that a significant portion of Google's overall profits comes from advertising, but this momentum is currently weakening. Recently, we have seen other social media platforms, such as TikTok, gaining significant traction.

Young people are spending hours on platforms like TikTok. From the advertisers' perspective, this is very attractive. Additionally, companies that are AI-based recognize that this market is vast and highly profitable. Google has maintained a sort of monopoly, sharing the market primarily with Amazon. Of course, Meta shows strong performance in the SMS advertising sector. Recently, companies like Percy, founded by former OpenAI employees, are pursuing subscription-based economic models but are also actively seeking AI-driven targeted advertising. As these changes occur, competition is intensifying, which could diminish Google's stronghold. The situation with Samsung Electronics is quite similar; Google is seen as a monopolistic powerhouse.

There's a school-like atmosphere, but there's a lack of a hungry mentality and a sense of urgency. In August, Eric Schmidt, the former CEO of Google, mentioned that if Google pursues remote work and work-life balance, it will ultimately win. He stated that it's impossible to dominate the AI sector by overwhelming other companies. He indirectly criticized the current CEO of Google, Sundar Pichai, and although Schmidt later said that his comments were misinterpreted, he fundamentally believes that if a company focuses too much on satisfying employees with remote work and work-life balance, it ends up lacking a hungry mentality, which leads to losing rather than winning. Recently, such aspects have been reflected in Google's culture, and Schmidt further discussed these points regarding startups like OpenAI.

The reason AI is standing out is that the employees are working like hell. I've marked it with an arrow, and that's how they talk about it. So, there are issues with corporate culture and employees' work ethic, which can also be seen as a problem of alignment. Google is so large, with around 200,000 full-time employees and a similar number of non-regular employees, that it has become bloated, possibly lacking in corporate spirit. This aspect is somewhat similar to the current issues faced by Samsung Electronics. Lastly, you might be aware that before AI, Google and Meta were the two giants in the search market and digital advertising. Recently, Amazon has been making strides, but in AI, we are entering a more fragmented era. OpenAI and Microsoft are key players, and then there’s a company called Pik, founded by OpenAI's creators, which is also emerging.

Good job. In addition, in the safer industry, here too, the founders of OpenAI are coming out, and I think that three to five companies will dominate the global market. It seems to be transitioning from a monopoly to an oligopoly. In conclusion, while Alphabet has some concerns, it is still an attractive company that continues to grow steadily and generate significant profits, making it suitable for long-term holding with relatively low risk. It does not take overly aggressive risks, and it has the best talent. Most importantly, its valuation is low, with a price-to-earnings ratio of about 20. Therefore, even if the U.S. market undergoes a correction, the decline in stock prices will be relatively small, making it suitable for long-term holding. That is what I wanted to convey. I will conclude here. Thank you.

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