Google Is a Secular Short

The smartest investors in the world are piling into Google parent Alphabet’s stock.

Warren Buffett recently confirmed that he initiated Berkshire Hathaway’s purchase of Alphabet shares, including a $10 billion private placement last month.

Chris Hohn, who has one of the best track records of any fund manager in history and ran the world’s most profitable hedge fund last year, sold most of his Microsoft position earlier this year and bought more Alphabet stock.

But these storied investors may be wrong. Deeply wrong.

In an AI world, Google’s underlying fundamentals and the durability of its competitive advantage are built on quicksand. The cracks in the foundation are starting to show.

Strategic Misstep

This post is not a call on Alphabet’s second-quarter earnings report this Wednesday. The Google Cloud unit is likely to report another stellar revenue number, as there is overwhelming demand for AI compute. But I’m confident Google will begin to deteriorate materially in the coming year.

Alphabet bulls like to cite the company’s incredible financial performance. Revenue in the March quarter grew by 22%, with the cloud unit rising 63% over the prior year. But at what cost? Google’s strong cloud numbers belie a critical strategic mistake. It is mortgaging its future to goose current financials.

Microsoft CEO Satya Nadella is pushing back at Wall Street and dedicating a significant amount of AI compute to internal purposes rather than offering it to external Azure clients, to the detriment of Microsoft’s revenue and stock price. Alphabet appears to be doing the opposite.

Last week, Bloomberg reported that Google engineers are expected to use AI to generate code, but when they do, they “often hit capacity constraints” due to a lack of computing power and internal competition for it.

What’s incredible is that Google is offering, and will continue to offer, this mission-critical compute to its biggest AI rivals.

Earlier this month, SemiAnalysis said that even though Alphabet recently raised $80 billion in capital, the “majority” of the additional compute will be rented out to customers like Anthropic, leaving DeepMind with less training compute than OpenAI, Anthropic, and Meta. SemiAnalysis called that “loser mentality” from Google. I agree.

It inflates today’s numbers while eroding tomorrow’s moat. Boosting the stock price now is myopic, short-term thinking when doing so will enable frontier AI startups to disrupt Google over time. It reminds me of how the Netscape browser promoted Yahoo, which went on to become the internet’s default directory guide. Yahoo then helped Google by outsourcing its search feature to them, enabling Google to become a search monopoly.

Compute is a scarce input. Google is now supplying both OpenAI and Anthropic with inference capacity and underlying AI compute, giving oxygen to its own existential threats. History repeats itself. You should not help your main rivals with the most critical technology of the generation, when your own employees are starving for compute. It’s penny wise and pound foolish.

Gemini AI Problems

I just finished Sebastian Mallaby’s book The Infinity Machine, about DeepMind founder Demis Hassabis, and I’m confused about why the media is so enamored with Hassabis and DeepMind. After reading the book, I was not impressed.

Hassabis and DeepMind chase one shiny vanity science project after another while being blindsided by every major commercial AI advance, from large language models and reasoning models to agentic AI. They miss and fall behind every big AI wave.

Most importantly, Google has fallen critically behind in the third major wave of AI computing: coding agents and agentic AI. Anthropic and OpenAI are thriving by selling coding agents to corporations, generating billions in revenue that could turn into hundreds of billions in the coming years.

Gemini has become a laughingstock among AI model enthusiasts in Silicon Valley. Where’s Gemini on the coding agent leaderboards? Nowhere. Bloomberg also reported Google is “months” behind schedule with Gemini 3.5 Pro as it tries to improve its coding capabilities.

Many wonder why Google with all of its resources can’t beat a tiny Chinese startup like Kimi maker Moonshot in the AI model race. Even the one time Gemini caught up, with its release late last year, it was state-of-the-art for just six days before being overtaken by Anthropic’s Claude Opus.

Cultural Rot

The primary problem is Google’s stifling bureaucratic culture. It is coming home to roost at the worst possible time, just as AI disruption accelerates.

I’m a big believer in the mantra that culture is destiny. In recent years, I’ve spoken with over a dozen former Google employees, and I hear a consistent message: Google has one of the worst corporate bureaucracies in the world. Employees are incentivized to spend their time and resources on career advancement rather than on serving the end user. Decision-making is glacially slow. Political infighting runs rampant. Getting anything done requires sign-offs from several different executives. There is meeting after meeting, and workers are drowning in corporate legal and policy reviews.

The problems reek of process-oriented management consulting philosophy, which should be no surprise, as Alphabet CEO Sundar Pichai is a former McKinsey consultant. In 2021, The New York Times reported that more than a dozen former Google executives accused Pichai of slow decision-making and of allowing the “paralyzing” bureaucracy to fester. It doesn’t look like Pichai has fixed it.

“Google has multiple layers of stakeholders involved in preparing models for release, working to weave AI across a vast product portfolio, including search, maps and YouTube, which can cause delays,” the earlier recent Bloomberg report said. “But encouraging leadership of every department to move in the same direction is like trying to boil an ocean,” according to one former employee Bloomberg quoted.

Many get worn down and exasperated. I believe that is why Google has a talent retention problem. Notably, all eight Google scientists who authored the seminal AI Transformer paper soon left the company to pursue AI entrepreneurship elsewhere. “I think the bureaucracy [at Google] had built to the point where I just felt I couldn’t get anything done,” Llion Jones, one of the paper’s coauthors, told CNBC. “Every day I would be spending my time trying to get access to resources, trying to get access to data.”

It is getting worse. In June, Google lost two of its highest-profile AI employees in the same week: Noam Shazeer to OpenAI and Nobel Prize winner John Jumper to Anthropic. There were reports that compute allocation was a factor.

The Shazeer case is fascinating. He left Google in 2021 to found a startup. Google then paid $2.7 billion to license Character.AI’s technology and bring him back to work on AI. Less than two years later, he left again, this time for OpenAI.

Search Monopoly Will Be Disrupted

The vast majority of Alphabet’s profits still comes from search ads next to blue links in the search engine. Given the user behavior of early adopters, it seems likely that most search queries will rapidly transition to AI chatbots, meaning the search ads gold mine era will end. It is inevitable.

Google will no longer be the 90%-plus search monopolist it is today in an AI first world. Perhaps Alphabet will be a major player in AI chatbots with Gemini say, 30–40% share, or even 50%. But even a good market share would be catastrophic for Google’s share price. Monetization as an oligopoly player will be much lower. Google will still make money, but it will not be as dominant as it was in the past decades. It will be one of several players. AI chatbots also cost more to serve, as they use more compute than a web search index, which will further compress profit margins.

Google should be in a great position in the AI race with its data, billions of users, and financial resources. But the reality is it is not. Misexecution and cultural rot abound. Key employees are frustrated at being unable to get the resources they need. They are leaving. The underlying problems will show up in the numbers. Once the market sniffs it out, the stock will drop precipitously.

Google is a secular short.

Disclosure: I hold no financial positions in Alphabet.

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