Alphabet hit with double downgrades on AI fears

Alphabet CEO Sundar Pichai Hardik Chhabra/ The India Today Group via Getty Images

The Google search bears, fearing a near-term defeat by generative AI, have spoken.

Google’s parent company Alphabet has been hit with a double-duty downgrades from Wall Street analysts this week, as UBS AG and Bernstein both warned of the near-term threat that generative AI poses to the lucrative business of Google search advertising.

In a lengthy 39-page report Monday, UBS said the advent of AI-powered search from rivals like Microsoft and OpenAIs ChatGPT, as well as Google’s Bard product, will significantly change how consumers find information. on the web and how businesses reach customers. with search ads.

It’s possible people will find creative ways to include sponsored links in responses, but the click-through rate will be substantially lower than what would have happened with the previous 10 blue link ad model, says the UBS report, citing a former Google SVP No-name Ads & Commerce its analysts spoke to.

Over time, Google will figure out this monetization, UBS analysts said, noting that they don’t view the shift to AI search as jarring as the transition from desktop PCs to smartphones that Google successfully navigated a decade ago. But the result for now, UBS said, is disruption to the well-oiled search monetization machine, as well as pressure on Google’s profit margins due to its higher spending on artificial intelligence.

UBS downgraded its rating on Alphabets stock to Neutral in Mondays notes, with analysts at Bernstein following suit Tuesday and lowering their rating from Market Outperform to Market Perform.

Shares of Google are down more than 3% this week, while the broader market has posted small gains.

Alphabet’s image suffered another setback on Tuesday when The Wall Street Journal reported on a study that said it had major problems with Google’s business of placing video ads on third-party websites. According to research by brand marketing analyst firm Analytics, 80% of ads served by Google violated the company’s standards for website quality in the ad network and other criteria. A Google spokesperson told the WSJ that the study makes many inaccurate claims.

In his downgrade of Alphabets’ shares on Tuesday, Bernstein analyst Mark Shmulik warned that the firm’s aggressive push to integrate generative AI into core search results could create a short-term air pocket on the prices of the search ads.

It’s time to step aside, Shmulik advised investors, noting that Alphabet has gone from too slow to too fast in AI.

The comments underscore the challenging balancing act for Alphabet, which must keep pace with search competition from Microsoft and OpenAI, without rocking the boat so much that it causes problems in its search advertising business.

Alphabet CEO Sundar Pichai even said the company is prepared for the pending tipping point, telling Bloomberg that Google is more ready for the shift to AI than it was for mobile. And at the Google I/O developer conference, the company received positive feedback for introducing new AI tools, with the Motley Fool reporting that the event re-established the company as a top of artificial intelligence.

A recent Bank of America survey found that while ChatGPT is already used by more than half of US Internet users, four out of 10 people surveyed say they are now using search chatbots offered by Google and Microsoft several times a week.

The poll comes from a BofA report that also says Google could benefit from the wave of generative AI. We believe using LLM could be incremental to mainstream search, according to analysts at Bank of America, which has a buy rating on Google stock.