Analysts stay positive on Google AI after historic value wipeout
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Alphabet stock (NASDAQ:GOOGL) has slipped another 5.2% Thursday, a negative outlier in Communication Services stocks amid some ongoing pressure focused on what looks like a potential vulnerability to Microsoft (NASDAQ:MSFT) in the field of artificial intelligence.
If GOOGL fails to rally in the afternoon action, it's headed for a 13% drop over two days - which would be the biggest two-day decline in the stock since the Global Financial Crisis in 2008, and a wipeout of some $165B in market value.
Wednesday brought a 7.7% fall in GOOGL stock after a Paris presentation on its AI efforts largely seen as uninspiring.
And that just increased the focus on Alphabet's battle with Microsoft (MSFT) over who can take the lead in mindshare for the future of AI. Minutes after Google rolled out its "Bard" rival to OpenAI's well known ChatGPT, Microsoft said it would hold a surprise event showing the latest integration of ChapGPT with its Bing search engine. (Microsoft has increased its partnership with OpenAI to a potential value of $10B.)
Despite Alphabet's swoon, Wall Street analysts remain bullish, with consensus Strong Buy ratings on GOOGL, and several are calm about the latest slips. Microsoft has had "better product strategy and demos" of late, while Google has looked "reactive," BofA said. But there's likely "product and distribution advantages for Google search," and Google probably has "superior AI technology for search, or at least better data."
The bank has a $125 price target now implying 33% upside.
Google's Paris event was "disappointing," UBS concluded. It put a "Catch-22 dilemma on full display. If Google moves too quickly here, it risks (1) reputational damage, (2) potential to displace search ad revenue, and (3) potential increase in cost to serve."
"At the same time, if they move too slowly, competitive fears will grow, particularly with Microsoft sounding willing to lean into its effort to gain share in search," UBS said.
Still, "To the extent MSFT shows any significant marketing support behind Bing, and if Google continues to delay, we might start to worry more about share loss and high decremental margins, but we are not overly concerned on this quite yet."
Truist noted that Google's cautious approach has weighed on the stock, but "we believe its leadership in AI research is undeniable," and Google's search leadership will out when it's all said and done: "We suspect that when integrating AI into both systems, we should not see a material change."
"The AI race is on," Morgan Stanley analyst Brian Nowak allows. The opportunity is large, but a deeper-than-expected integration of artificial intelligence into search points to some higher incremental search compute costs to come. He estimated that Google's current compute cost per search is a fifth of a penny - and the firm's work on natural-language queries suggests they could be five times that cost on average.
Not all queries will be integrated with natural language, he notes, but Google's commentary makes him believe the change will be material - and every 10% of Google Search queries that add AI/natural language could add $1.2B to 2024 operating expenditures (all else being equal, reducing the firm's 2024 estimate for earnings before interest and taxes by 6%). That means Google's promised higher cost efficiencies are even more important now.
Seeking Alpha authors call GOOGL a Buy, while Seeking Alpha's Quant Ratings consider the stock a Strong Buy.