Alphabet Faces Search Engine Shift Amid Apple’s AI Remarks
Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) experienced a significant decline last week after an Apple (NASDAQ: AAPL) executive predicted that traditional search engines would be supplanted by artificial intelligence (AI)-driven search capabilities. This announcement caused Alphabet’s stock to drop by 7%.
Importance of Google Search Revenue
During the first quarter, 56% of Alphabet’s revenue was generated from its Google search engine, making this segment vital to its business model. If AI does replace Google search, investors may worry about the future of Alphabet’s stock.
Management’s Awareness and Action
Alphabet management acknowledges these AI-driven challenges. It is actively working to incorporate AI into its search functionalities.
Users are now seeing AI summaries at the top of Google searches instead of traditional search results. During its Q1 conference call, management revealed that this feature has gained popularity and continues to grow. Additionally, Alphabet is focused on expanding use cases for AI in search.
Potential Benefits from Apple’s AI Plans
Despite the negative stock market reaction, it may be premature for investors to panic. They could find reasons for optimism.
One reason for optimism is that Alphabet might reduce its payments to Apple for being the default search engine on Apple devices. In 2022, Alphabet paid Apple $20 billion for this status, which has drawn scrutiny amid antitrust discussions.
Financial Impact of Revenue Changes
If Apple chooses to offer AI-based search alternatives, Alphabet may no longer need to invest that $20 billion, leading to an immediate boost in profits.
Given that Alphabet has reported around $111 billion in profits over the past year, eliminating that cost could increase profits by nearly 20% overnight.
GOOGL Net Income (TTM) data by YCharts
While user preferences may shift if alternative search engines are offered, Alphabet’s Google remains the leading search platform globally, suggesting many users would still choose it. Thus, a substantial share of potential profits could be preserved.
Outlook for Alphabet’s Stock
This situation does not signify the end for Alphabet’s stock; rather, it presents a new opportunity.
Currently, Alphabet’s stock trades at a low price of 16 times forward earnings, which appears favorable for investors.
GOOGL PE Ratio (Forward) data by YCharts
If Alphabet can avoid paying Apple the $20 billion, this lost expense would directly benefit the company’s net earnings.
# Alphabet Stock: An Opportunity Amid Market Concerns
This would decrease the denominator of the price-to-earnings (P/E) ratio, making the stock even cheaper.
Despite broader market unease regarding Alphabet’s stock, the current pessimism appears misplaced. The present stock price offers significant value for investors willing to ride out short-term fluctuations.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Keithen Drury holds positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Apple. The Motley Fool maintains a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
