There are several reasons why it’s best to steer clear of Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) shares. Among these various reasons, a key one that could affect the future performance of GOOG stock is rising competition.
High competition is having a greater impact on Alphabet’s cloud computing and streaming segments. However, not even its bread-and-butter search advertising segment may be immune.
Admittedly, it’s not set in stone that ChatGPT, which has been hyped in the media as a possible “Google killer,” will erode the company’s search dominance. However, recent news regarding an investment in ChatGPT’s developer may suggest an increased likelihood of future “disruption,” by one of this tech giant’s key rivals, no less.
Let’s dive in, and see why this possible development may further dampen this stock’s long-term appeal.
| GOOG | Alphabet | $91.46 |
GOOG Stock and a Potential Negative Development
Since launching on Nov. 29, ChatGPT has taken the world by storm. Although the buzz surrounding it has calmed down in recent weeks, there’s still a lot of talk about this artificial-intelligence chatbot, or more advanced chatbots introduced down the road, eventually destroying Google’s status as the internet’s gateway.
OpenAI, the company behind ChatGPT, has only recently entered the commercialization stage. However, this early-stage AI company is working aggressively to scale up and is currently raising billions in additional capital. Per recent reports, Microsoft (NASDAQ:MSFT) could be a big investor in this funding round. The software giant is already an investor in this startup and is its cloud services vendor.
But if reported talks of another $10 billion investment prove true, Microsoft will become the largest shareholder in OpenAI, owning a 49% stake. Making such a large investment would also likely open the door for greater usage of OpenAI’s technology across its platforms.
In fact, before this latest development, there were already reports of Microsoft’s plans to integrate ChatGPT into its Bing search engine. Combining deep pockets with disruptive technology, a growing Microsoft-OpenAI relationship could be bad news for GOOG stock in the long run.
Why This Deal Could Drain Google’s Deep Moat
Sure, while it has conquered numerous digital frontiers, Microsoft in its history has had mixed success in the search engine space. Despite its efforts with Bing, launched in 2009, it has only been able to grab a single-digit share of the search engine market.
But now, thanks to ChatGPT and other technological advances from OpenAI, the tech powerhouse may finally have the ingredients in place to grab a much larger share of the search market from Alphabet. That’s not to say that Microsoft is going to fully “disrupt” Google search, yet it may drain much of the deep economic moat that currently surrounds this business.
In particular, the rise of a serious competitive threat could impact the profitability of Google’s search business. Analysts from Morgan Stanley have recently argued that the rise of advanced, AI-powered search tools could force Google to incorporate more of this technology into its own platform. This in time could put pressure on its profit margins.
Lower profitability from its Search segment could be a drag on Alphabet’s overall results, especially if the competitive pressures experienced by the company’s other major segments, such as Google Cloud and YouTube, continue to limit their respective earnings growth potential.
The Takeaway
The prospect of Microsoft’s greater involvement with OpenAI and ChatGPT provides yet another reason to tread carefully with Alphabet shares. Along with this concern, don’t forget there are other factors still at play that stand to affect GOOG’s performance.
It may not be until late 2023 at the earliest that the digital advertising space begins to bounce back. Even if this does arrive on time, the company may have to handily beat current 2024 earnings expectations ($6.07 per share) for it to move the needle for the stock.
Barring an unexpected twist, such as management implementing an aggressive cost reduction plan, and/or initiating a dividend, shares will likely continue to disappoint in 2023.
The near-term remains murky, and long-term prospects are increasingly coming under threat by rising competition. There’s now more reason to sit on the sidelines with GOOG stock.
GOOG stock earns a D rating in Portfolio Grader.
On the date of publication, Louis Navellier held GOOG and MSFT. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.