Analysts have talked about Alphabet Inc.’s future in a world where AI becomes more common for the past year and a half.
Alphabet’s stock GOOG, -0.75% GOOGL, -0.77% has so far calmed fears that Google’s core search business could lose money if people ask AI assistants (including Google’s own) their questions instead of using a regular search engine and clicking on links to other sites. Alphabet stock has grown by more than 100% since the beginning of 2023.
Rosenblatt Securities analyst Barton Crockett, on the other hand, thinks that investors should now take a break. He lowered his rating on Alphabet shares from buy to hold on Friday, citing “multiple areas of transitional risk.” He also suggested “stepping back for a little while to see how the company handles” changes in the market.
In Friday morning trading, shares of the company that owns Google are slightly down.
Crockett said that Google has been promoting its AI Overviews, which answer questions that people type into its search engine in a conversational way. “At launch, the obvious risk is that AI Overviews has a low ad volume, and click-driven search revenue may go down in some cases as links become less important,” he wrote. However, the company can increase the ad load over time.
People like AI Overviews, but Crockett said the new format “presents a transitional risk of ad slowdown near term, similar to what Meta went through with Reels.”
He also said there was “early evidence of search share loss to Bing,” which is Microsoft’s MSFT, 0.25% rival search engine.
Not only does Crockett worry about AI, he also worries about the future of search ad revenue. For example, he talked about the rise of “retail media.” For example, he said that Amazon.com Inc. AMZN, -1.49% and Walmart Inc. WMT, -0.45%, two of the biggest names in online shopping, have both seen sharp increases in their ad revenue recently.
Another ad risk comes from Amazon’s “aggressive entry” into video advertising. Commercials are now a standard part of Prime Video. Crockett says this could spell trouble for Alphabet’s YouTube business.
He said that things are getting tougher for Alphabet’s search business in the second half of the year. “Risk investors are worried about how that will affect competition,” Crockett said. “Even if a 2H24 search slowdown is mostly comp driven.”
Lastly, he said that Alphabet might end up in a “higher-than-anticipated [capital-expenditure] spending cycle for AI.” This is because companies are under pressure from competitors to make sure they have a good handle on the technology.
