The transition to a world where AI becomes an essential part of many facets of life is currently underway. As this takes place, the world’s biggest tech companies are positioning themselves to claim a big chunk of the action.
Amongst them is Alphabet (GOOGL), the search giant already involved in plenty of AI endeavors. However, Rosenblatt analyst Barton Crockett thinks that moving into this new paradigm presents several challenges and demands a rethink regarding GOOGL’s prospects. “We lower our Alphabet rating to Neutral (from Buy), seeing multiple areas of transitional risk that recommend stepping back for a little while to see how the company handles it,” explained the analyst.
That new rating is backed by a slightly reduced price target, too, which moves from $182 to $181, suggesting shares are currently fully valued. (To watch Crockett’s track record, click here)
A primary concern for Crockett revolves around the impact AI will have on GOOGL’s main breadwinner, its Search business. Interestingly, some of it is of its own making.
In mid-May, Google started broadly rolling out AI Overviews in the U.S., a feature within Google Search that offers AI-generated summaries and insights with these conversational summaries appearing above links for many queries. The goal is to expand this feature globally to reach 1 billion users by the end of the year.
The “obvious risk” at launch, notes Crockett is that the volume of ads in AI Overviews is limited, and click-driven search revenue might decrease as links become less prominent. That said, ad monetization in AI Overviews is expected to increase over time and consumers appear to generally favor the change, with 48% in a Tinuit survey indicating it improves their search experience. Nevertheless, says Crockett, this presents a “transitional risk of ad slowdown near-term, akin to what Meta went through with Reels.”
Moreover, there’s also a risk that AI Overviews “to some degree eats its seed corn.” An expert at Raptive suggested there could be a 25% traffic loss to websites, as AI Overviews offer answers directly, reducing the necessity for “clicking out.”
At the same time, given shifting search habits, GOOGL’s Search business appears to be losing some share to Bing. According to Statcounter, Google’s global search share for the past 10 weeks stands at 91%, down from 93% a year ago, while Bing’s share has increased from 2.8% to 3.7%.
Crockett’s cautious take is not one widely shared on the Street. While 5 analysts join him on the fence with Hold ratings, they are overcome by 32 Buys, all culminating in a Strong Buy consensus rating. Going by the $199.25 average target, a year from now, shares will be changing hands for a 9% premium. (See Alphabet stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
