Stock Of Alphabet Downgraded Again As Google Moves From Slow to Fast In AI

Bernstein analyst Mark Shmulik, while previously likening Alphabet Inc.'s stock to a comforting "warm hug," has now made the decision to detach from the embrace, at least for the time being.

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Shmulik highlighted that periodically, the stock appears to be fairly valued, and that is the case at present, with a balanced risk/reward ratio and a narrative that has aligned with the company's fundamentals. The shares have experienced a notable 40% increase from their low point in November. Taking these factors into account, Shmulik downgraded Alphabet's stock (GOOG, GOOGL) from an "outperform" to a "market perform" rating on Monday.

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One of Shmulik's concerns relates to Alphabet's shift from being perceived as too slow to too fast in the field of artificial intelligence (AI). Earlier this year, there were investor concerns that Alphabet was not doing enough in AI to keep up with Microsoft, which had gained favor due to its partnership with ChatGPT creator OpenAI. However, now that Google has plans to integrate AI into its own search product, Shmulik is worried that the company might unintentionally impede its core advertising business.

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Shmulik stated, "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," referring to Google's Bard AI assistant and the integration of AI products into Google Search results. This concern has gained traction on Wall Street recently, especially considering the upward movement in Alphabet shares. UBS analyst Lloyd Walmsley also highlighted this issue in a downgrade on Monday.

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Investing in AI, however, comes at a cost.

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Shmulik noted that Google faces a unique risk in protecting its Search business from potential challengers while simultaneously expanding opportunities related to the Google Cloud Platform (GCP). He also mentioned that Google has been more cautious in reducing costs compared to its peers over the past nine months, which may limit its flexibility to meet investors' expectations for margin growth.

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Competition is another concern for Shmulik.

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He emphasized that Google's dominance in the search market is facing increasing threats. The rise of retail media, the shift of advertising dollars towards Meta (formerly Facebook), changes in consumer behavior towards vertical-specific searches, the convergence of trade and search ad budgets, and near-term risks related to AI monetization all contribute to the pressure on Google's Search growth.

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Shmulik also took into account that Amazon.com possesses a $40 billion digital advertising business that is increasingly competing with web search for ad spending. Moreover, he observed a reluctance among traditional ad dollars to transition 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."

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