Artificial intelligence (AI) is rapidly changing the way many companies, across all industries, are doing their day-to-day work. Some of the biggest changes are undoubtedly in technology, where many top companies are investing heavily into AI chatbots and related functions.
As that happens, one company that may be most directly affected by all this is Alphabet (GOOG 3.67%) (GOOGL 3.64%), whose Google Search engine is a huge part of its business and generates tens of billions of dollars in ad revenue each quarter. As AI potentially changes how people search for questions and do research, could that spell big trouble for Alphabet’s business?
Image source: Getty Images.
Apple executive believes current search engines could be in trouble
AI is changing the way people search for answers to their queries. Chatbots such as ChatGPT and Perplexity are making it possible for people to have their questions answered without having to open up a browser and go to a search engine like Google.
Apple (NASDAQ: AAPL), which has Google as the default search engine on its Safari browser, is looking to add AI services as possible search options in the future, according to its senior vice president of services, Eddy Cue. He believes that AI-powered searches will be the new norm, replacing conventional search engines.
Shares of Alphabet fell on the news, with investors worrying that this could create a significant risk for the business in the long run. That’s because the bulk of the company’s ad business comes from its search business. Through the first three months of the year, Alphabet’s ad revenue totaled $66.9 billion.
Of that tally, $50.7 billion was from Google Search and other (which includes Gmail, Google Maps, and Google Play), representing a little over three-quarters of that figure. A decline in traffic for search could severely affect how much advertisers are willing to pay Google, which would be a big hit to its top line.
Why investors shouldn’t panic, at least not yet
AI is revolutionizing sectors and industries, and Alphabet is by no means immune. At the same time, the company is also investing heavily into AI and its Gemini chatbot. If you use Google Search today, you might see an “AI Overview” section at the top of your results, which summarizes the findings and gives you a response similar to what you might get with other chatbots. It gives users a good mix of both an AI-generated response to their questions and the conventional link-based results some people may prefer.
The company is adapting to changes related to AI, and I believe it’s in a good position to benefit from them. Google’s brand has become synonymous with search, and there’s much more trust there than with new and upcoming chatbots, where users may have doubts about accuracy. It’s been more than two years since ChatGPT arrived on the scene, and there hasn’t been a sharp decline in Google’s ad business to suggest that it’s in trouble.
Instead, the business continues to grow. While it may lose some business as a result of AI in the future, the tech company can also make its searches better with Gemini, not only on Google Search but on YouTube as well.
Is Alphabet a good stock to buy right now?
Alphabet’s business is facing a lot of questions, especially with respect to search. AI is changing the game, and last year a judge found that Google has had a monopoly on search. More recently, it was also found to be monopolizing the online ad market.
All this negative press has weighed on the stock, which today trades at just 16 times its estimated future earnings (based on analyst expectations). That’s a fairly low valuation for a business that has generated significant growth over the years, but investors are clearly worried about its growth prospects in the long run.
However, at such a low valuation, I think investors are well compensated for the risk that comes with the stock, especially since Alphabet isn’t exactly standing still. AI introduces some new challenges, but it’s creating opportunities as well. Provided that you’re willing to hang on and be patient, Alphabet can still be a good long-term buy.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Apple. The Motley Fool has a disclosure policy.