Alphabet shares declined sharply following headlines suggesting that Apple may drop Google as the default search engine on Safari. We view this market reaction as overdone and disconnected from fundamentals, presenting a compelling opportunity to accumulate shares in a resilient, cash-generative compounder.
We believe that even if there is loss of market share in the overall search market, the financial impact should be more than offset by the cost savings likely to accrue from the termination of this deal ($20 Billion) and the fact that the overall search and digital advertising market is growing at a resilient pace is another benefit.
The company generated $121 Billion in operating earnings from its services segment in 2024 (search is the biggest contributor here), which means that the operating earnings would have to drop by more than 16.5% to create a negative delta when compared to the $20 Billion in cost savings and based on the kind of market share loss seen over the past 2 years, this seems like a massive stretch.
1. Apple-Safari Headline: Misinterpreted Risk, Potential Financial Benefit
While the market fixated on the potential loss of default status on Apple’s Safari browser, we believe this change may in fact benefit Alphabet financially:
- Google currently pays Apple an estimated $18–20 billion per year to remain the default search engine — a direct cost to margins.
- Should this deal be dropped, Google would retain its scale and user preference-driven traffic, while improving operating margins due to the savings.
- Historical precedent shows that users overwhelmingly reset their default search to Google even when alternatives are offered.
2. Search Market Share: Persistent Dominance Despite AI Entrants
Narratives around Google’s fading search dominance have persisted for over two years, particularly since the launch of ChatGPT and Microsoft's Bing GPT integration. Yet:
- Google’s market share in global search has remained stable, with no meaningful erosion in the face of AI-native competitors.
- Despite numerous alternatives, Google continues to serve as the gateway to the internet for billions — benefiting from brand trust, infrastructure, and distribution scale.
- We believe that even if there is loss of market share in the overall search market, the financial impact should be more than offset by the cost savings highlighted above and the fact that the overall search and digital advertising market is growing at a resilient pace is another benefit.
The company generated $121 Billion in operating earnings from its services segment in 2024 (search is the biggest contributor here), which means that the operating earnings would have to drop by more than 16.5% to create a negative delta when compared to the $20 Billion in cost savings and based on the kind of market share loss seen over the past 2 years, this seems like a massive stretch.
3. Underlying Business Strength Evident in Latest Earnings
Alphabet’s Q1 earnings demonstrated broad-based revenue growth and operational discipline:
- Search and YouTube continue to deliver strong top-line contributions, aided by improving ad demand.
- Google Cloud Platform (GCP) remains in expansion mode, with improving profitability and strategic relevance in enterprise AI adoption.
- Operating margin expansion across the board was driven by ongoing cost controls and scale benefits.
4. Valuation: Attractive Entry Point with Margin Upside
At current levels, Alphabet trades at a forward free cash flow yield of over 5%, an attractive valuation for a high-margin, capital-light business with multiple growth levers.
- We believe management has multiple levers to expand margins and improve free-cashflow generation through opex discipline, reduced TAC payments (traffic acquisition costs), and efficient AI infrastructure investments.
Conclusion:
In our view, the recent correction in Alphabet’s share price reflects headline-driven sentiment rather than any structural deterioration in the business. The Apple-Safari speculation is unlikely to materially impact search usage or revenue and may instead enhance profitability. Backed by consistent earnings growth, dominant market position, and compelling free cash flow economics, we see Alphabet as mispriced relative to its quality and stability. This presents a buying opportunity for long-term investors.
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