Alphabet Traders Look to Developer Event to Shift AI Narrative

Yahoo

20-05-2025

(Bloomberg) -- Alphabet Inc.'s investors are looking to this week's developer conference to see if the company can reset the narrative amid fears that its long-standing market dominance is on shaky ground.
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The Google I/O event, which begins Tuesday, is expected to showcase the company's latest advancements in artificial intelligence. Positive updates could help ease concerns about the rivals nipping at its heels and eating away at its dominant position in web search, even as the company spends heavily on AI.
'The hope is that it will provide a roadmap for a strong future, because right now everyone is waiting for a shoe to drop and has their finger on the trigger for any negative headline,' said David Katz, chief investment officer at Matrix Asset Advisors. 'I think it is far stronger than the stock is currently discounting, so view the negativity as a buying opportunity, but it definitely faces more headwinds with AI than it ever did with legacy search.'
The stock is down 12% this year, compared with a gain of 2.1% for the Nasdaq 100 Index. Meta Platforms Inc., the other significant player in online advertising, is up almost 10%.
Recent weakness in Alphabet came after an Apple Inc. executive said during court testimony that searches on its Safari web browser fell for the first time in April. Alphabet disputed this, and pointed to I/O as a place where it can address concerns by sharing its latest innovations. Last week, The Information reported that Alphabet will unveil an AI agent for software development at the event, along with a Pinterest-like feature, among other updates to its Gemini AI chatbot. However, an underwhelming presentation may be a cause for further weakness.
'A good story may not be enough at I/O this time around to sway investors given we're now armed with recent data points around slower paid click growth, Safari search volume declining for the first time in 22 years, and ChatGPT and Meta AI's march to a billion users,' Bernstein analyst Mark Shmulik wrote.
Since ChatGPT emerged in late 2022, Alphabet has seen repeated selloffs on concerns it is falling behind in AI. The issue, along with heightened antitrust uncertainty, has weighed on Alphabet's multiple, making it the cheapest big-tech stock by far.
Alphabet is still viewed as a central player in AI in terms of both talent and intellectual property, and the stock has repeatedly bounced back from slumps. The company's most recent results beat expectations and showed AI-related demand, while an April event focused on the company's cloud business was viewed positively as a sign that the company could capitalize on AI.
However, new entrants in AI have made Alphabet look as though it is playing defense, especially when it comes to search, which accounts for more than half of the parent company's revenue and the vast majority of profits. According to the latest Statista data, which is from March, Alphabet has about 89.7% of worldwide market share for search engines, compared with 92.9% in January 2023, around the time ChatGPT took the tech world by storm.
Ben Reitzes, Melius Research's head of technology research, writes that Alphabet 'is sure to come out swinging' at the event, but that 'in order to get more positive, we need to see evidence that Gemini can be monetized to replace search as we know it.' He has warned that the company is at risk of losing younger users to companies like OpenAI.
A key question for investors is how much the stock already reflects these concerns and what a fair value would look like as its market share settles over the longer term. Currently, shares trade at 16.4 times estimated earnings, under its 10-year average of 20.5. The stock sits at a notable discount to other megacaps and the Nasdaq 100 Index, where the multiple is 26. Meta, its closest peer in both business model and multiple, trades at 23 times future profits.
This valuation comes even as analysts continue to anticipate strong long-term growth potential. Revenue is seen rising at a double-digit clip every year through 2028. Net earnings are expected to grow almost 20% this year, even as Alphabet spends heavily on AI. Analysts expect $74.9 billion in capex this year, growing to $77.1 billion in 2026.
'If Alphabet can pull its great tech, talent, data, and user base into one compelling offering at I/O, there's definite upside,' said Michael Brenner, senior research analyst and asset allocation strategist at FBB Capital Partners. 'The stock certainly looks cheap, but it isn't one of our biggest overweights because you have these question marks surrounding its biggest business. There's nothing to stop the multiple from falling further if the threat doesn't dissipate.'
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--With assistance from Subrat Patnaik, Andy Lin and Vlad Savov.
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