Bernstein analyst Mark Shmulik likens Alphabet Inc.’s stock to the feeling of a “warm hug,” but for the time being, he’s willing to let the embrace go.
“Every so often [the] stock appears fairly valued just as it does today, with a balanced risk/reward and narrative that has quickly caught up to fundamentals” and shares that have risen about 40% from their low point in November. With that backdrop, he downgraded Alphabet’s stock
to market perform from outperform late Monday.
Among Shmulik’s concerns is that the Google parent company moved “from too slow to too fast in AI.” Investors had been somewhat concerned earlier this year that Alphabet wasn’t doing enough in AI to keep pace with Microsoft Corp.
which was winning the battle of public opinion thanks to its partnership with ChatGPT creator OpenAI. But now that Google has plans to integrate AI into its own search product, Shmulik worries the company could end up eating into its own bread-and-butter advertising business.
“Google has been aggressively shipping gen-AI products and starting to integrate Bard into Google Search results,” he wrote, referring to the company’s Bard AI assistant. “Google risks creating a near-term revenue air pocket by cannibalizing prime real estate for their gen-AI results, which will take time for ad buyers to adopt.”
That concern is increasingly resonating on Wall Street lately in light of the move higher in Alphabet shares, with UBS analyst Lloyd Walmsley also highlighting it in a Monday downgrade.
Investment in AI, of course, comes at a cost, too.
“Google is faced with a unique risk associated with protecting their Search business from would-be challengers in addition to building out new GCP-related opportunities,” Shmulik wrote, referring to the Google Cloud Platform. “Google was also far more conservative taking cost out vs. peers over the last 9 months which likely leaves less wiggle room to meet investors’ margin growth expectations.”
Shmulik is concerned about competition as well.
“Google’s search market position is under increasing threat,” he said in his note to clients. “We see the rise of retail media, dollar shift back up-funnel to Meta, changing consumer behavior to vertical-specific searches, convergence of trade and search ad dollars, and some near-term AI-related monetization risks all contributing to pressure Google Searches growth.”
He takes into account that Amazon.com Inc.
sits on a $40 billion digital-advertising business that’s increasingly competing with web search for ad money.
Plus, he sees a stubbornness in the online media landscape, as traditional ad dollars remain slow to move over to platforms like YouTube. “We’ve also seen the mobile portion of YouTube’s ad business face material competition from TikTok, which increasingly looks like a ban won’t materialize anytime soon.”