Barclays stays bullish on Google despite 'new era' of AI threats
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Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) is "years ahead" in artificial intelligence, but that doesn't mean the stock won't be range-bound for a while until the ad market turns and some competition worries fade, Barclays argues.
That comes in an extensive search "unpack" the bank performed as Alphabet shares move into "new territory," with search facing down new threats from AI-assisted search from rivals - and the prospect of losing some of its dominant share of Internet queries.
"The last 10-plus years have seen few investors or analysts question Googleâs strength in the digital advertising industry and in Search more specifically," analyst Ross Sandler said. "Itâs been a period of everything up-and-to-the-right, from query share, to query growth, to revenue to profits."
That changed in November as OpenAI's ChatGPT launched, he said - adding that while commentators have dug into the extreme cost of AI-assisted search (a tenfold increase vs. traditional queries), not much has been said about how Google losing share affects overall profitability.
Sandler notes a few key concerns, most notably in the case that most zero-click searches today transition to AI assistance (as mentioned, at 10 times the cost), and Alphabet could see a "material" hit to its operating income. Meanwhile, if Apple (AAPL) looked to upgrade its Siri assistant to incorporate the new AI features - as it's likely to do at some point - or, if Apple gets pushed into paid search by regulatory scrutiny of the Google-Apple traffic arrangement, then "we think as much as 20% of iOS query share is at risk," he said.
Meanwhile, it "seems a long shot" but Microsoft's (MSFT) push of its new AI-assisted Bing search on the desktop might "claw away a few points of query share in that channel."
He and Barclays are still positive on Alphabet, with an Overweight rating and a $160 price target implying 72% upside, and citing attributes including brand strength, superior search quality and query economics, and the power off holding default positions on mobile and desktop, however long those persist.
But Alphabet (GOOG) (GOOGL) is in a "new era," Sandler said. "One where the buyside canât simply 'set-it-and-forget-it' with a 5% position. Investors are going to have to pay very close attention to not only the changing technology backdrop with AI, but how the relationships between Google and its partners evolve as a result of these changes."
Still, an ad market recovery and "several quarters" of upside can start in the second half of the year, and "When that phase comes back to the forefront, we think GOOGL shares can re-rate higher and we want to be there for that."
Earlier, Defiance ETFs CEO Sylvia Jablonski suggested AI-related stocks may be near-term winners if the Federal Reserve can engineer a soft landing for the economy.