Wall Street has mixed feelings about Alphabet. Here’s why that matters for its stock.
Sentiment is of paramount importance for growth stocks because it’s how investors justify paying more in anticipation of big growth
The disruptive nature of artificial intelligence makes predicting its impact on companies with precision almost impossible. It’s why Alphabet Inc. has been a highly contested stock among investors trying to grapple with how to value its business at a time when it could face disruption from artificial intelligence.
Search engines, on which Alphabet Inc.’s core business relies, are no longer the only way to seek information from the World Wide Web. There are now a handful of different AI chatbots that can respond to queries, including OpenAI’s ChatGPT, Anthropic’s Claude and xAI’s Grok. These tools can change how people interact with the internet and potentially make search engines obsolete. That possibility is making investors nervous about Alphabet Inc.’s stock.
Meanwhile, on a relative basis, Alphabet’s stock looks the cheapest among its “Magnificent Seven” peers based on its recent forward price-to-earnings ratio of about 17.7, which is how much an investor pays for every dollar the company is expected to earn. The average among the seven names, including Apple Inc. Nvidia Corp.
, Meta Platforms Inc. , Amazon.com Inc. , Tesla Inc. , and Microsoft Corp. is at about 44, according to data compiled from FactSet.The reason Alphabet’s stock has a far lower valuation relative to its Big Tech peers is that investors expect Google search’s revenue growth to decelerate significantly in the near to medium term as it loses market share to AI chatbots, said Gil Luria, head of technology research at D.A. Davidson. Meanwhile, investors believe the other six companies are expected to be bigger beneficiaries of AI trends at varying degrees, he added.
And that outlook is a problem: Expectations or sentiment is of paramount importance for growth stocks because it’s how investors justify paying more for them in anticipation of big growth, said Mark Malek, chief investment officer at Siebert Financial. Judging by Alphabet’s lower forward P/E ratio, investors perceive it as more of a mature company rather than one with big growth prospects. And that outlook would make sense if the focus is on its search engine business, he added.
To determine what was plaguing investors, Bank of America decided last week to host a private debate to go over the pros and cons of Alphabet. During the event, institutional investors chimed in and shared their thoughts. It was attended by over 200 investors who demonstrated mixed feelings about the stock, though the investment bank noted there seemed to be a good amount of bulls who favored the company.
Still, some of the main concerns among investors confirmed that they were worried about Alphabet’s core search-engine business, including the rising competition from AI. Since AI chatbots can respond to queries, including in spoken language, users now have many options for how they want to interact with content, including directly through downloadable apps.
Another concern was whether the company would be able to generate revenue if its own search engine was also posting AI-generated answers at the top, which would limit a user’s need to scroll and click through links or see ads.
Finally, investors worried whether the Justice Department’s antitrust case against the company could result in barring it from paying traffic acquisition costs to get default search engine placements from companies like Apple, which would be another source of lost traffic.
The sentiment toward Alphabet wasn’t all negative. Investors recognized that the company had multiple products within its ecosystem that it could leverage to build AI tools. Platforms like YouTube and Google Maps give the company direct access to user data that can help build customized AI and ad targeting tools. Investors also liked that Google’s search engine remains a popular way to find products or services when they want to make a purchase.
But perhaps the biggest argument in favor of Alphabet’s stock is that it has many other business segments with big growth prospects. They include Cloud, YouTube, its AI model Gemini and Waymo, its self-driving-car project. All of these could become strong growth drivers.
However, each business is very different from the other, which makes it difficult to value them as a group, Luria noted. He said the best course of action the company could take is to spin off each segment into its own company. This would allow more transparency into the health of each business and enable investors to value them separately.
One solution investors felt would remedy the issues was that Alphabet needed to provide more visibility into the business and a multiyear plan of how the company would drive users to use Google to search. Another solution investors suggested was ramping up its AI offerings by promoting Gemini and offering competitive subscription pricing.
Malek said that, despite the soft outlook on Alphabet’s growth, the company is undervalued because its smaller segments are growth businesses that are just being overshadowed by the issues with its search engine.
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