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Search competition fears hit Alphabet stock yet again. We see no reason to join the sellers

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2 months ago

July 26, 2024

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Search competition fears hit Alphabet stock yet again. We see no reason to join the sellers

Fears that OpenAI’s new search engine will challenge Google’s dominance in the near term are exaggerated, especially because Alphabet is already playing offense by integrating generative AI tools into its own platform. ChatGPT creator OpenAI on Thursday announced a prototype of its search engine, SearchGPT, in an effort to directly compete with Google Search. The Microsoft -backed AI startup said SearchGPT will generate quick responses to user queries that include relevant sources from the web. Users will be able to ask follow-up questions to add more context with each query. OpenAI said the prototype is currently available to a small group of people for feedback. Alphabet shares fell 3.1% on the news Thursday, underperforming the tech-heavy Nasdaq , which dropped 0.9%. The stock lost about 0.3% in Friday’s session and again lagged the Nasdaq, which added roughly 0.8%. Anytime there are headlines about search-engine competition for Google, “a sell-first, ask-questions-later situation” tends to play out, said Director of Portfolio Analysis Jeff Marks during the Investing Club’s Friday’s Morning Meeting. We’re skeptical that’s the right strategy, to say the least. Investor concerns about the proliferation of generative AI chatbots and the risk they present to Alphabet’s core search-engine business are not new. It’s been a worry ever since OpenAI rolled out ChatGPT in November 2022, taking the world by storm with its ability to churn out humanlike written responses on all manner of topics. GOOGL YTD mountain Alphabet’s year-to-date stock performance. We keep a close eye on the competitive landscape. However, the Google Search business continues to perform well. Just this week Alphabet reported better-than-expected second-quarter revenue for its search unit. “Not really seeing any decline in web traffic away from web search” despite the popularity of AI chatbots,” Marks said Friday. “So, maybe this threat here is a little overblown, as well,” he continued, referring to OpenAI’s SearchGPT. After the launch of ChatGPT, the next shot fired at Google Search in the generative AI race came in February 2023, when Microsoft relaunched Bing as an AI-powered search engine. It’s hardly knocked Google of its search-engine throne. In the 10 weeks ended in June, Google’s worldwide share was 91% compared with 3.7% for Bing, according to Statcounter data, cited by Rosenblatt analysts. That’s a slight change from the same period in 2023, when Google had 93% versus 2.8% for Bing, Rosenblatt said in a June 28 note to clients. While Rosenblatt described it as “nascent evidence of search share loss to Bing,” it still looks like a commanding lead to us — especially when paired with Alphabet’s latest results. Alphabet’s efforts to incorporate generative AI into Google Search — dubbed “AI Overviews” — are resonating with users, CEO Sundar Pichai said on the conference call. AI Overviews provide conversational summaries to user queries placed through the traditional search bar. “We are pleased to see positive trends from our testing continue as we rollout AI Overviews, including increases in [Google Search] usage and increased user satisfaction,” Pichai said. He added that people are looking for help with complex topics are engaging more and keep coming back for AI Overviews. Pichai also said there’s higher engagement from younger users aged 18 to 24. Some Wall Street analysts echo our view that SearchGPT is not an immediate threat to Google. “The new Search engine will likely have minimal impact on Google’s search revenue,” Bank of America wrote in a note to clients Friday. While SearchGPT may gain interest and activity on the web, analysts pointed to Alphabet’s growing revenues with its AI integration as a source of confidence that Google Search is the unshakable leader. “ChatGPT and Bing Web traffic remain a fraction of Google,” analysts said. As of June 2024, Google had web traffic of 2.7 billion daily visits, 28 times more than ChatGPT daily visits and 62 times greater than Bing. Citigroup also championed Alphabet’s ability to fend of competition. “We recognize the challenges a more competitive search market can bring, but we also believe Google’s Gemini, AI Overviews, and its product halo position Google well to compete,” Citi analysts wrote to clients Thursday. To be sure, the AI threats to Google Search is not the only question on Alphabet investors’ minds. There’s also a growing debate about whether the company’s heavy investments into AI are generating adequate return. That was one factor that pressured the stock in Wednesday’s session. Management believes the risk of underinvesting is greater than the risk of overinvesting in this area — a view we share. (Jim Cramer’s Charitable Trust is long GOOGL, MSFT . See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Idrees Abbas | SOPA Images | Lightrocket | Getty Images

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