The dominance of Alphabet’s Google in online searches has been largely unchallenged for years. However, with the rapid adoption of OpenAI’s ChatGPT, some investors are now concerned that Google’s supremacy may be at risk. While Alphabet’s stock has risen by 20% this year, there have been several sharp drops amid concerns that Google could lose clicks to Microsoft, which has incorporated ChatGPT into its Bing search engine. Additionally, on Monday, the 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.
Alphabet consolidated artificial intelligence research groups into one unit on Thursday, a move that CEO Sundar Pichai said would accelerate the company’s progress in AI. Although Alphabet’s shares rose by 0.6% on Friday, the company has a lot to lose if it loses its near-85% worldwide market share in an internet search. This is compared to Bing’s 8.9% market share. Furthermore, Alphabet gets a much larger share of the revenue from online search and advertising than Microsoft.
Despite this, analysts say it may be some time before AI technology becomes a meaningful driver of search-related revenue, and most view Alphabet as being well-positioned for the long term despite early missteps. Search is a huge deal for Alphabet, with 57% of the company’s revenue last year being derived from “Google Search & Other,” according to Bloomberg data. For Microsoft, only 5.8% of its 2022 revenue came from search advertising.
However, the risk to Google’s search business, which generated sales of more than $160 billion last year, has prompted some investors to reduce their exposure to Alphabet. Michael Lippert, portfolio manager at the Baron Opportunity Fund, said, “Even if Google in the new world gets 60%, ChatGPT gets 30%, and everybody else gets crumbs of 10%, you go from 90% to 60%. It’s very hard to know exactly what the monetization will be.” The prospect of a pricey battle for market share, especially amid an uncertain backdrop for the macroeconomy, to which the advertisement market is highly correlated, has the potential to weigh on sentiment.
Despite the concerns, Alphabet’s valuation may be a factor in its favour, with the company trading at less than 18 times its estimated earnings. Alphabet is also the cheapest of the four largest technology and internet stocks, including Apple, Amazon.com, and Microsoft. Alphabet is trading below its 10-year average multiple and is the only one of the four priced at a discount to the Nasdaq 100. Stephen Lee, founding principal at Logan Capital Management, said, “Alphabet isn’t expensive by historical standards, and as investors, we like to invest in companies with good balance sheets and the ability to play through headwinds. Alphabet fits that category.”
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