On December 7, 2023, Alphabet Inc. (GOOG, GOOGL) experienced a notable 5.34% surge in its stock value following the introduction of Gemini, a large language model (LLM) designed for artificial intelligence (AI) applications. This launch positions Alphabet to compete with Microsoft-backed OpenAI’s ChatGPT, challenging Microsoft’s assumed monopoly in the AI sector.

Key Points:

1. **Gemini’s Impact on Share Prices:**
– Alphabet’s shares responded positively to the unveiling of Gemini, highlighting its potential significance in the AI landscape. The three versions of Gemini, namely Ultra, Pro, and Nano, power Google’s generative AI chatbot, Bard.

2. **Gemini vs. ChatGPT:**
– Alphabet CEO Sundar Pichai praised Gemini’s Ultra version for surpassing benchmarks in various tasks, intensifying the competition with Microsoft’s ChatGPT. Gemini’s capabilities include simultaneous recognition of videos, images, text, and voice, making it a versatile AI model.

3. **Market Reaction and Analyst Views:**
– JPM analyst Doug Anmuth’s positive views on Gemini’s impact on the industry contributed to the market’s reaction. The different sizes of Gemini make it adaptable to various use cases and hardware capabilities, enhancing cost management.

4. **Reassessment of Valuation Differences:**
– The article suggests that the release of Gemini prompted a repricing of valuation differences between Google and Microsoft, challenging the notion of Microsoft’s monopoly on AI. Despite differences in content and addressable markets, the competitive dynamics between the two tech giants are evolving.

5. **Valuation and Growth Comparison:**
– While Google’s valuation appears fair from a historical EV/EBITDA ratio perspective, the forward ratio indicates a built-in multiple contraction. The growth in EBITDA forecasts for Google is comparable to Microsoft, with Google’s EV/EBITDA substantially lower.

6. **Cloud Performance Concerns:**
– The article acknowledges that Google Cloud lags behind competitors AWS (Amazon) and Azure (Microsoft). GCP’s higher cost for customers poses challenges to its expansion, raising potential downside risks to Wall Street’s optimistic EPS estimates.

Conclusion:

The release of Gemini marks a significant leap in AI for Google, challenging Microsoft’s perceived leadership in the field. While Google’s shares surged after this development, the article cautions against overly optimistic expectations, pointing out the potential risks associated with Wall Street’s aggressive EPS estimates and Google Cloud’s comparative underperformance. The verdict suggests that Google is a strong ‘Hold’ in a long-term portfolio, but the recent rapid rally warrants cautious allocation.

Note: The article reflects the views of Danil Sereda, Chief Investment Officer at a family office and leader of the investing group Beyond the Wall Investing.