Alphabet’s AI Challenges: Navigating Market Turbulence
Concerns Over Competition and Market Share
For over a year, shareholders of Alphabet Inc. have expressed deep concerns about the long-term risks posed by artificial intelligence (AI) to the company’s lucrative search business. Recent developments have made these risks feel much more immediate.
This week, court testimony from an Apple Inc. executive revealed that Apple is exploring the addition of AI services to its web browser, Safari. Currently, Google pays Apple an estimated $20 billion annually to be the default search engine on Safari, making this potential shift particularly alarming for Alphabet shareholders.
Further complicating matters, Eddy Cue, Apple’s Senior Vice President of Services, noted that searches on Safari experienced a decline for the first time last month. These revelations imply that AI competitors, such as OpenAI and Anthropic, may already be siphoning off users from Google’s search service, which accounts for over half of Alphabet’s revenue.
Market Reaction and Shareholder Anxiety
The unsettling news triggered a selloff, causing Alphabet shares to close down 7.3% on Wednesday. Despite Alphabet’s assurances that search queries continue to grow—including those originating from Apple users—the company is still on track for a weekly decline of about 6%, which translates to a staggering $120 billion drop in market value.
Bloomberg
Art Hogan, Chief Market Strategist at B. Riley Wealth Management, articulated the prevailing concern: “The basic issue is, will Alphabet lose its cash cow? This is the first time Alphabet has really seen competition in search since the category was originated, and we’re already seeing chinks in the armor.”
AI and Market Volatility
Fears surrounding Alphabet’s ability to compete in the AI space have led to multiple selloffs since ChatGPT’s launch in late 2022. For instance, in February 2023, Alphabet’s stock took a hit when concerns about the accuracy of its AI chatbot emerged.
Nevertheless, Alphabet has rebounded from such losses in the past. Until just recently, the company was enjoying an upswing. This surge followed an earnings report indicating that its search advertising business remained strong for the first quarter ending March 31.
The latest selloff underscores the heightened anxiety surrounding AI disruption risks, even for a company with formidable talent in the field. Investors are struggling to fairly value this tech giant amidst ongoing uncertainties.
Valuation Concerns and Analyst Sentiments
Traditionally, Alphabet has traded at a discount compared to other megacap peers like Microsoft Corp. However, this gap has widened over the past year due to worries that Alphabet is lagging in the AI race.
As of Wednesday’s market close, Alphabet’s shares were priced at 15 times projected profits for the next 12 months, a notable drop from the average of 21 times over the past decade. In contrast, Microsoft trades at 30 times projected profits, compared to an average of 26.
Hogan further emphasized the uncertainty, stating, “We don’t know how much share it might lose, or how quickly, which complicates the earnings part of the P/E multiple.”
An Alphabet representative declined to comment on the situation, but the company’s market share appears relatively stable. The latest Statista data from March shows Alphabet holding approximately 89.7% of the worldwide search engine market share, albeit down from 92.9% in January 2023.
Analyst Views and Future Forecasts
Despite recent dips, Wall Street analysts remain predominantly bullish on Alphabet. Over 80% of the 76 analysts tracked by Bloomberg who cover the company have assigned buy ratings. However, this figure lags behind other megacaps, where over 90% of analysts recommend buying stocks like Microsoft and Amazon.
Evercore ISI analyst Mark Mahaney highlighted that although Google’s search volume growth has decelerated, revenue expansion remains consistent. He encouraged clients to consider purchasing shares following the recent drop.
However, some analysts are sounding alarms. Ben Reitzes from Melius suggested that current estimates forecasting 2025 net income of $115 billion may be overly optimistic. “Given the April trends indicated in Cue’s comments, paid clicks could be getting worse,” he noted in a recent research note.
Conclusion
As Alphabet navigates these turbulent waters of competition and market sentiment, it remains quintessentially imperative for investors and shareholders to remain vigilant. The technological landscape is shifting rapidly, and Alphabet’s responses to these challenges will undoubtedly shape its future trajectory.
Questions and Answers
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What recent revelation has increased concerns for Alphabet’s shareholders?
Recent court testimony from an Apple executive indicated that Apple is exploring AI services for its Safari browser, which could threaten Google’s dominant position as the default search engine.
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How did the stock market react to these concerns?
Alphabet shares fell by 7.3%, with the company on track for a weekly decline of about 6%, amounting to a $120 billion drop in market value.
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What is Alphabet’s current market share in search engines?
As of March, Alphabet holds approximately 89.7% of the worldwide search engine market share, down from 92.9% in January 2023.
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How do analysts view Alphabet’s future?
More than 80% of analysts covering Alphabet maintain buy ratings, though there are concerns regarding the company’s ability to compete effectively in the AI arena.
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What potential risks are highlighted by analysts regarding Alphabet’s profitability?
Concerns exist about future profitability due to increased competition in the search engine market, which may impact earnings and the company’s price-to-earnings (P/E) multiple.
