The financial and tech worlds are buzzing about a possible “disruptor” of the tech giant’s core search advertising business. In my view, much of this talk of “disruption” and a possible “game over” moment for the company at this point seems overblown.
Only time will tell whether this new application, which very much remains a work-in-progress, is something that could put Google’s dominant search engine onto the path to obsolescence.
That said, the emergence of this potential threat does underscore an important point: not even Alphabet’s core business is safe from the same competitive risks affecting its cloud computing and streaming segments. Rising competition, on all sides, is something that could severely impact this stock’s rebound potential.
What ChatGPT Currently Means for GOOG Stock
On Nov. 30, artificial intelligence (or AI) research organization OpenAI released its latest AI chatbot, ChatGPT. Within days, talk about it being a possible “disruptor” to Alphabet’s search business has started to emerge.
Given its ability to answer questions in a conversational way, there is some validity to the argument that it could one day supplant traditional internet search engines. However, while there is a lot of potential with ChatGPT, reports of its being a “Google killer” may for now be greatly exaggerated.
With one organization already banning ChatGPT’s use, due to it constantly giving the wrong answer, OpenAI still has plenty of work to do before this chatbot is ready for prime time. Still, this development does highlight how competitive risks with GOOG stock go beyond just the company’s non-search business segments.
As new technologies ChatGPT become even more viable alternatives to traditional search, Alphabet’s core business could be at risk of maturing, then entering a period of decline, far more quickly than once anticipated. Worse yet, this possible long-term threat is emerging, just as the aforementioned competitive challenges to both its cloud computing and stream businesses continue to rise.
High Competition May Limit Growth Re-Acceleration
In my last GOOG stock article, I presented three reasons why the tech giant’s shares could underwhelm. A key reason was competition in the company’s non-search businesses. Alphabet’s cloud business may be continuing to grow at a rapid clip. Last quarter, the segment reported 37.6% year-over-year revenue growth.
Yet with Google Cloud in third place (11% market share) compared to Amazon’s (NASDAQ:AMZN) AWS, and Microsoft’s (NASDAQ:MSFT) Azure cloud computing businesses, with 34% and 21% market share, respectively, may limit future growth.
More importantly, it could challenge an eventual move to high profitability. Currently, this segment generates around $700 million in operating losses per quarter.
Regarding Alphabet’s YouTube segment, platforms like TikTok have been eating its lunch, as online viewing habits switch to short-form videos. YouTube is now attempting to play catchup. It’s also looking to increase its presence in the connected TV (or CTV) segment of the streaming space, but this too may be an area where earlier movers (including Amazon’s Freevee service) may have the advantage.
With all this competition, Alphabet already faces an uphill battle when it comes to re-accelerating its growth. If competition starts to heat up with search, this battle could intensify.
While the latest headlines about ChatGPT do not make more downbeat about Alphabet stock, they certainly do not make me more optimistic. It may not be for certain just yet (given the apparent flaws with ChatGPT), but this technology is something that could affect the ability of Google’s search unit to remain a high-margin business with steady operating results.
This comes atop the risk that competitive challenges affect future prospects for Google Cloud and YouTube. Barring unforeseen success with one or two of the company’s moonshot “Other Bets,” Alphabet, in the years ahead, could deliver growth well below expectations.
Without growth re-acceleration, it will be difficult for the stock, trading for 18.5 times earnings today, to re-hit loftier past earnings multiples. As more suggests middling returns lie ahead, be careful buying GOOG stock after its latest pullback.
GOOG stock earns a D rating in Portfolio Grader.
On the date of publication, Louis Navellier held AMZN, GOOG and MSFT. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.