Google, led by Sundar Pichai, at risk of falling behind in AI due to ‘Clear and Present Danger’
Investors in Alphabet Inc., led by CEO Sundar Pichai, are solely focused on the success of artificial intelligence. This was evident when the company’s stock plummeted after Google’s main AI product experienced issues. The drop in share price wiped out $80 billion in market value in just one day, highlighting the significant role AI plays in investor decisions.
For the company with the world’s largest digital advertising business — its operations generated more than $100 billion in cash last year, a record portion of which returned to shareholders — the threat is simple: another company might develop an AI-powered search engine. That, as unlikely as it seems now, will make Google obsolete.
“Lagging Alphabet in AI is a clear and present danger,” said Tom Graff, chief investment officer at Facet. “The downside is so significant for Alphabet that it really can’t be priced in.”
The stock fell 0.2 percent on Friday. The stock is negative this year compared to the roughly 15 percent rise in the Bloomberg Magnificent 7 Total Return index.
Such a scenario would put in jeopardy the nearly $200 billion in revenue that Google is expected to generate from searches this year — the business from which Alphabet derives most of its profits.
Alphabet has been among the world’s most valuable companies for most of the past decade, largely because of its dominance in online advertising. But it has been overtaken this year by Nvidia Corp. — whose rise has made it the poster child for the artificial intelligence mania that has reorganized the stock market.
Although it still dominates search and the company is hardly in existential danger, AI’s missteps marked a stunning setback for a company known for its technical prowess — raising questions about whether investors can trust Alphabet to stay ahead of the pack.
More than a year after the debut of OpenAI’s ChatGPT, Alphabet is still struggling to prove its technology can compete despite its many years in the industry.
As a result, the stock has been sensitive to any signs of strength or weakness on the AI front. February’s decline was reminiscent of a similar event last year, when concerns about the accuracy of its Bard chatbot led to heavy selling, and in December the well-received release of the company’s Gemini AI model sparked a relief rally.
Investors are so aware of the risks of being left behind in AI that they’re turning a blind eye to the stock, which is by far the cheapest of the largest U.S. tech companies at about 19 times earnings over the next 12 months. Meanwhile, Alphabet’s revenue and profit growth prospects for the coming year are on par with Microsoft Corp. and far better than Apple’s, even though the stock trades at a deep discount to both.
Search is seen as the primary use case for generative AI and chatbots, meaning Alphabet’s dominant market share is at risk, while Microsoft — which has incorporated AI capabilities into Bing — has only the upper hand, a factor that has insulated Microsoft’s shares from its own controversies. So far, Alphabet has maintained its dominance with about 91 percent of global search shares, compared to Bing’s share of about 3.4 percent, according to Statista.
“Of course there is a ‘moat’ in search, but this space is about to be disrupted,” wrote Melius Research analyst Ben Reitzes, who called Alphabet a “cheap cause.” He added that Alphabet outperforms megacap competitors in terms of growth, recurring revenue and margin optimization.
Yet few AI Followers count out the alphabet. It has invested in the technology for years and has the infrastructure and engineering capability deemed necessary to launch a competing product.
Bernstein’s Mark Shmulik wrote that he felt compelled to defend Alphabet, even though he is among the 15 percent who do not have a buy rating on the stock.
“Ever since OpenAI released ChatGPT in late 2022, Google’s response has looked more like a bodybuilder who has been told his muscles are all on display, fights and gets punched,” he wrote. However, “at a time when next-generation AI answers have gained consumer trust, Google should be in the best position to integrate these results alongside online survey results, giving consumers the best of both worlds.”
However, getting to this point can be long and expensive. “They have the resources and the ability to produce something credible, but we don’t know if it will be a significant driver of growth,” said Philip Lawlor, head of market research at Wilshire Indexes.
“If you don’t have a credible product, it’s about survival.”
Today’s technical map
Shares of Advanced Micro Devices Inc. have continued to climb to hit new highs this year. Considered one of AI’s primary beneficiaries, optimism about new AI processors has helped AMD shares recover from a weak forecast.
