As the dominant force in online search, Alphabet Inc’s Google. for many years had little difficulty challenging its supremacy. But OpenAI’s rapid adoption of ChatGPT has some investors concerned that that could be about to change.
Although Alphabet has rallied 20% this year amid a rebound in tech stocks, the stock has had some steep declines due to concerns that Google is at risk of losing clicks. Microsoft Corporation., is integrating ChatGPT into its Bing search engine.
On Monday, shares fell as much as 4% on a report that Samsung Electronics has considered replacing Google with Bing as the default search engine on its devices. That followed a 12% drop in two days in February after demonstrating Google’s homegrown chatbot service, Bard raising questions about its accuracy. On Thursday, Alphabet consolidated its artificial intelligence research teams into one unit, a move that CEO Sundar Pichai said would accelerate the company’s progress on AI.
Alphabet rose 0.6% on Friday.
According to Statista data, with Google holding almost 85% of the worldwide market share in internet search, it has a lot to lose compared to Bing, whose market share stood at 8.9%. Not only that, Alphabet also receives a much larger share of revenue from online search and advertising than Microsoft.
“Even if Google in the new world get 60%, ChatGPT get 30% and others get 10%, you go from 90% to 60%,” said Michael Lippert, portfolio manager at Baron Opportunity Fund .
Risks to Google’s search business, which generated more than $160 billion in revenue last year, have led Lippert to reduce its exposure to Alphabet. “It’s hard to know exactly what the earning potential will be,” he said.
The prospect of a costly battle for market share — especially amid macroeconomic uncertainty, to which the advertising market is highly correlated — is likely to weigh on sentiment.
“The best-case scenario for Alphabet is that it maintains its market share, and because it has started from a very strong position it has a lot of money,” said Jim Awad, senior managing director of Clearstead Advisors. much to lose.”
Search is a big deal for Alphabet. Last year, 57% of the company’s revenue came from “Google Search & Other,” according to data compiled by Bloomberg. For Microsoft, 5.8% of its 2022 revenue comes from search advertising.
However, analysts say it may be a while before AI technology becomes a meaningful driver of search-related revenue, and most think Alphabet will be well-positioned in the industry. long term despite early mistakes.
“The perception around AI has overshadowed the real financial impact in the short term,” said Stephen Lee, founding principal at Logan Capital Management. “AI hasn’t driven revenue yet, and it’s too early to tell how things will look in the long-term.”
One factor in the stock’s favor is its valuation. Alphabet trades at 18 times earnings estimates, making it the cheapest of the four biggest internet and tech stocks, a group that includes Apple Inc. and Amazon.com Inc., in addition to Microsoft. Alphabet is trading below its 10-year average multiple and is the only one of the four undervalued by the Nasdaq 100.
For Lee, this is part of the allure of the stock.
“Alphabet is not expensive by historical standards and as investors we want to invest in companies with good balance sheets and the ability to weather headwinds,” he said. “The alphabet fits that category.”
