Google and Intel – Two Stories

Google Q1 25 – Search remains untouchable

• Google reported good results as Search continues to contemptuously brush off the generative AI threat, giving it time to ensure that it is Gemini that Google Search users eventually switch to as opposed to OpenAI, Perplexity, Meta or any of the others.
• Q1 25 Revenues ex-TAC / EPS were $76.5bn / $2.81 nicely ahead of expectations of $75.4bn / $2.01.
• Search revenues grew by 10% YoY despite the increasing presence and ability of generative AI services, once again underlining that generative AI services are still not well-suited for consumer use.
• This is because the vast majority of the queries that go into Google are very simple, such as “replacement bicycle tyre” or “where can I get Indian food?”, which generative AI services are not well placed to address.
• This is why almost all of the action in generative AI is in the enterprise, where the enquiries are much more complex and where generating text provides productivity benefits.
• I suspect that this is why OpenAI and its competitors have yet to make a dent in either Google or Bing which I don’t think is going to change until consumer behaviour shifts.
• Google Cloud also had a good quarter, growing by 28% YoY to $12.3bn, but said it could have grown more if it were not capacity-constrained in terms of bringing new data centres online.
• This sets the scene for another very strong quarter from the cloud driven by enterprise demand for AI which shows no sign of abating.
• Unsurprisingly, capex was also elevated at $17.2bn and Google remains on track to spend a massive $75bn on capex in 2025 up 42% YoY.
• It is this kind of expenditure that makes me nervous about overbuilding which is precisely what happened during the Internet bubble of 1999 and 2000.
• For the moment, there is no sign of this, and Google remains in a good position to migrate its users from its Search service to Gemini when they are ready.
• Google already claims it has 350m monthly active users of Gemini which is an indication that this process is already underway.
• Alphabet is trading at 18.6x 2025 earnings, making it one of the cheaper ways to play the AI boom, although for the moment, the investment is really in search and YouTube and not much else.

Intel Q1 25 – Dodo economics.

• Another rotten quarter from Intel, accompanied by cost-cutting will only increase the mutterings that Intel and the x86 architecture are now obsolete, meaning that another American titan may go the way of the Dodo.
• Q1 25 revenues / Adj-EPS were $12.7bn / $0.13 ahead of estimates of $12.3bn / $0.01 but then went on to guide badly for the coming quarter.
• Q2 25 revenues are expected to be $11.2bn – $12.4bn well below consensus at $12.9bn which, combined with another round of cost cuts, did not give the market much confidence that the worst is over.
• Here, operating expenditure is expected to be reduced to $17bn in 2025 and $16bn in 2026, with the market expecting this to come from 20,000 job cuts.
• This is part of the shake-up that Mr Tan is instigating to turn Intel’s slow and bureaucratic culture into one of dynamic innovation, but other than cost cuts, there is very little he can do.
• Technical issues with foundry prevent it from spinning out for at least a couple of years, and with the spend-to-catch-up strategy seemingly now in the bin with Mr Gelsinger’s departure, Intel appears to be in limbo.
• This is occurring just as the threats to its mainstay x86 business from Arm-powered processors in both PC’s and the data centre are becoming very real and could not come at a worse time.
• Intel has missed both the shift towards mobile and AI, and its jugular is exposed.
• This is why the ongoing fight between Arm and Qualcomm is hurting both parties, as they should be working together to take share from x86 instead of fighting each other.
• This is pretty much the only breathing space that Intel has at the moment, but this is far from being enough.
• With no strategy to fix the company in sight, I think it is going to continue to sink.
• I do not want to buy this at pretty much any price.