Alphabet Faces Challenges Amid AI Competition and Share Decline

Shares of Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) have declined by 12% in 2025. The Google parent company is trailing the Nasdaq Composite, which has seen only a 1% year-to-date decline as of this report.

On the surface, the stock seems like an attractive buy. Alphabet is one of the largest, most profitable firms globally, boasting a strong brand in Google. However, some investors are questioning Google’s competitive edge in the search market. There’s a noticeable trend of users opting for OpenAI’s ChatGPT and other AI models as alternatives to Google Search.

Emerging Competition for Google Search

Leading AI models such as OpenAI’s ChatGPT and xAI’s Grok are posing serious competition by functioning as effective search engines. In May, Alphabet’s stock fell sharply following reports that Apple had seen a decrease in Google Search volumes through its Safari browser for the first time in April, attributing this drop to the rise of AI.

Perplexity, which is designed to compete directly with Google, recently formed a partnership with Shopify. This allows users to make purchases through Perplexity’s platform. Should Shopify strike a similar deal with OpenAI, it presents a significant risk for Google, as Search is crucial for online shopping.

Adding to Alphabet’s challenges, its first-quarter earnings report revealed that paid clicks on ads displayed in search results grew by only 2% year-over-year. This is a sharp decline compared to the 5% growth seen in the same quarter the previous year. Given that Search revenue accounted for 56% of the company’s total revenue last year, this is concerning for investors.

Evaluating Google’s AI Capabilities

The market’s response to Apple’s search volumes might be an overreaction. Google Search serves over 2 billion users and handles more than 5 trillion searches per year. Alphabet quickly reassured investors after the Apple’s news, stating, “We continue to see overall query growth in Search,” and acknowledged an increase in queries from Apple devices.

Google’s competitive standing may be stronger than many investors perceive. Its AI model, Gemini, is currently ranked the top model on Chatbot Arena’s leaderboard. It excels in science and mathematics and effectively manages large volumes of information. Gemini is integrated across Google’s products, including AI Overviews in Search, which reach 1.5 billion monthly users.

While the 2% increase in paid clicks indicates some weakness in the advertising sector, Alphabet still reported solid first-quarter financial results. Revenue grew by 14% year-over-year on a currency-neutral basis. CEO Sundar Pichai attributed this growth to Google’s “unique full-stack approach to AI,” which encompasses hardware, software, and cloud services for businesses.

Why Alphabet Stock Remains Attractive

Alphabet’s primary advantage stems from its extensive data centers and AI infrastructure, including its proprietary AI chips, or Tensor Processing Units. As a leading hyperscaler in data center operations, the company is well-positioned to capitalize on the growing investments in cloud and AI services. Google Cloud’s revenue surged by 28% year-over-year last quarter, bringing its annual run-rate to $49 billion.

Despite the emerging competition in search, the stock appears undervalued, trading at just 19 times earnings, significantly below the S&P 500 average of 28. Analysts project the company’s earnings to grow at an annualized rate of nearly 15% in the coming years, suggesting the potential to double an investment in Google over the next five years.

It is essential for investors to take the threat from ChatGPT, Perplexity, and other AI models seriously, as a significant user loss could impact Google long-term. However, Google’s ecosystem, which includes not just Search but also 2 billion users across seven services, remains robust. This diversified offering, including Gmail and YouTube, provides a competitive moat that may be difficult for rivals to challenge.

Considerations for Investing in Alphabet

Before investing in Alphabet, consider this:

The Motley Fool’s analysts have identified what they believe are the 10 best stocks for investors to buy now, and Alphabet didn’t make the list.

While past performance of their recommendations like Netflix and Nvidia has yielded significant returns, it’s crucial to conduct thorough research before making investment decisions.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Ballard has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Alphabet, Apple, and Shopify.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.