Despite the success of Alphabet Inc.’s stock, which rose about 40% since November, Bernstein analyst Mark Shmulik has recently downgraded the company’s stock from outperform to market perform. Shmulik expressed concerns over Alphabet’s investment in AI, stating that the company has moved “from too slow to too fast” in AI development. The worry is that Google may cannibalize its own bread-and-butter advertising business by integrating AI into its own search product.
While investors were previously anxious that Alphabet wasn’t keeping up to pace with AI developments in comparison to Microsoft’s partnership with OpenAI, Google’s current advances in AI could lead to a revenue air pocket by cannibalizing prime real estate for their gen-AI results, making it harder for ad buyers to adopt.
This concern is shared by other Wall Street analysts, including UBS analyst Lloyd Walmsley who also mentioned it in Monday’s downgrade. Investment in AI is expected to come at a cost, and Google must maintain its balance in narrative and fundamentals to continue its success.
Google faces competition and margin growth concerns, says analyst
An analyst has raised concern about Google’s ability to protect its search business from competitors while also developing opportunities in its cloud platform. In a note to clients, the analyst warned that Google is under increasing threat due to factors including the rise of retail media, consumers shifting towards vertical-specific searches, and the convergence of trade and search ad dollars. The growth of Amazon’s digital advertising business is also seen as a threat to Google’s search market position. In addition, the analyst noted Google’s conservative approach to cutting costs, which may restrict its ability to meet investor expectations for margin growth. The media landscape is seen as stubbornly resistant to change, with traditional ad dollars slow to move to online platforms such as YouTube. Competition from TikTok is also affecting the mobile ad business of Google-owned YouTube.
