Analysis of Google’s $2.7B Deal with Character.ai

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Alphabet aka Google (Nasdaq: GOOG) recently reported stronger than expected results for its third quarter driven by the strong momentum in its cloud business.

Alphabet’s Financials

Alphabet’s third quarter revenue grew 15% to $88.3 billion, beating analyst estimates of $86.3 billion. Net income grew 34% to $26.3 billion or $2.12 per share, beating analyst estimates of $1.85 per share. 

By segment, revenues from Google Services that includes Search, Advertising, Android, Chrome, Hardware, Google Maps, Google Play, and YouTube ads grew 13% to $76.5 billion. Advertising revenue grew 10.4% to $65.85 billion, driven by strength across Google Search, Google subscriptions, platforms, and devices, and YouTube ads. Google Cloud revenues grew 35% to $11.4 billion ahead of analyst estimates of $10.88 billion. Revenues from Other Bets grew 31% to $388 million. 

Google’s AI Strategy

During the recent earnings call, CEO Sundar Pichai talked about its differentiated full stack approach to AI innovation  – a robust AI infrastructure including data centers, chips and a global fiber network; world-class research teams working on Gemini model capabilities, including long context understanding, multimodality and agentive capabilities;  and a broad global reach through products and platforms that touch billions of people and customers around the world.

Enterprise adoption of Google’s AI infrastructure, including Vertex and BigQuery, has increased, with customers like Hiscox and Snap benefiting from Gemini’s performance. Cybersecurity solutions powered by Google Threat Intelligence and Mandiant have also seen adoption growth. New tools in customer engagement have enhanced experiences for companies like Volkswagen, and employee agents in Workspace have improved work quality, as reported by 75% of daily users.

Internally, AI has boosted coding efficiency, with AI generating over a quarter of new code. The company has recently launched AI-driven search innovations, such as AI Overviews, Circle to Search, and Lens. AI Overview, now available in 100+ countries, drives deeper search engagement, and Lens facilitates 20 billion visual searches monthly.

Google’s Character.ai Deal

Earlier in the quarter, Google reportedly signed a deal with chatbot startup Character.ai for an estimated $2.7 billion. Menlo Park-based Character.ai was set up in 2022 by former Google engineers and AI experts Noam Shazeer and Daniel De Freitas. As part of the deal, Naom and 20% of its staff will work for DeepMind, Google’s AI arm. Character.ai will move away from building out the language model and will now pivot exclusively to post-training by using open-source models developed by others such as Meta’s Llama. Character.ai will also provide Google with a non-exclusive license for its current LLM technology.

Character.ai is a full-stack AI company that lets users personalize their AI experience by interacting with AI “Characters” that are chatbots mimicking famous personalities from history, fiction, and popular culture. It already has 18 million chatbots available that are accessed by over 20 million registered users. Character.ai expects to generate $16.7 million in revenues this year. It had raised $193 million in total funding. It raised $150 million in 2023 at a valuation of $1 billion.

Its stock is trading at $176.14 with a market capitalization of $2.16 trillion. It hit a 52-week high of $193.31 in July this year and a 52-week low of $124.92 in December last year.

Disclosure: All investors should make their own assessments based on their own research, informed interpretations, and risk appetite. This article expresses my own opinions based on my own research of product-market fit, channel execution, and other factors. My primary interest is in product strategy. While this may have bearing on stock movements, my writings tend to focus on long-term implications. The information presented is illustrative and educational, but should not be regarded as a complete analysis nor recommendation to buy or sell the securities mentioned herein. I am not a registered investment adviser and I am not receiving compensation for this article. I am an investor in this company.

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