Alphabet (GOOGL) Looks to Checkmate OpenAI With AI Search Strategy
As an investor in Alphabet (GOOGL), I've noticed the growing narrative: that Google is in 'managed decline,' threatened by OpenAI's rapid rise with ChatGPT. This perspective, popularized across podcasts and media, paints Alphabet as bloated, slow, and vulnerable to being overtaken. However, I believe these claims are premature.
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Rather than merely facing competition, Alphabet is quietly evolving its Search business with Gemini AI. Far from declining, the company appears to be strengthening its competitive edge, positioning itself for sustained growth and long-term outperformance.
Google's Gemini Is Far More than a Clone
Alphabet has launched the Search Generative Experience (SGE), an AI-powered update to incorporate directly into traditional Search results. Unlike ChatGPT, which runs independently from typical Search behavior, the Gemini-driven SGE is seamlessly integrated into the conventional Search page we've all known for decades.
In Alphabet's latest quarterly update for Fiscal 2025, SGE already has over 1.5 billion active users each month, which serves as evidence of extremely rapid adoption. It's clear to me that Alphabet understands its users well: instead of fully reinventing the Search experience, they have enhanced it, drawing from decades of user experience and data. This hybrid version deepens user trust, providing an engaging user experience while limiting incentives for users to migrate to competing products and services.
Gemini Doesn't Just Maintain Revenue, It Increases It
Another significant aspect of Google's Gemini integration is the clear presence of monetization. Alphabet purposely kept advertising in the mix of SGE. Right in the AI-generated Search responses, you get relevant sponsored responses and product placements. This keeps Google's precious ad chassis model intact without breaking income from it. For instance, searching for 'best running headphones' features prominently sponsored product recommendations and advertisements.
The most recent reports from Alphabet show near-double-digit year-over-year increases in Search ad revenue, confirming that this monetization strategy works well for Alphabet. Gemini increases the user's Search experience, verifying this monetization strategy without detracting from the core Alphabet revenue stream. Therefore, it not only maintains Google's current cash flow but also potentially opens up additional opportunities for highly targeted advertising, solidifying Alphabet's lead.
Why OpenAI May Face Problems Competing Long-Term
OpenAI, while exciting to the market with AI-driven Search via ChatGPT, will face more significant structural limitations compared to Alphabet. It seems that most of the monetization OpenAI will do revolves around subscriptions or application fees, which is far less lucrative, sticky, and sustainable than Alphabet's ad revenue model. This will potentially be a long-term competitive disadvantage for OpenAI when competing with Alphabet, which is underpinned by deeper financial capital and infrastructure.
That said, I do think there is enough room for many successful players in this industry. OpenAI's models shouldn't be underestimated, and it is currently the market-leading company for generative AI. The field is still open to play for, and I see many dominant companies winning big, with both Google and OpenAI claiming the limelight similarly.
Margins Under Fire Shouldn't Deter GOOGL Investors
That said, Alphabet faces significant challenges in managing the substantial costs associated with operating the computing infrastructure necessary for Gemini. AI-powered Search is likely to be significantly more expensive than traditional search, which could put long-term pressure on profit margins. To mitigate this, Alphabet must continue diversifying its revenue streams. Waymo, part of the 'Other Bets' segment, offers one promising avenue. Its autonomous ride-hailing service is already operational in parts of the U.S., though it faces steep competition from Tesla's (TSLA) emerging autonomy network.
There's also uncertainty around user behavior. As AI tools—including Google's own subscription-based chatbots—gain traction, they could begin to siphon traffic away from traditional Search. This shift could reduce ad-driven revenue and lead to further margin pressure, potentially forcing Alphabet to lean more heavily on subscription-based models similar to ChatGPT. As a result, some degree of valuation multiple compression may be warranted over the longer term.
Still, these risks seem manageable when viewed in light of Alphabet's strong history of adapting its business model to generate durable long-term returns as markets evolve.
Is GOOGL a Buy, Sell, or Hold?
On Wall Street, GOOGL has a consensus Strong Buy rating, based on 29 Buys, nine Holds, and zero Sells over the past three months. The average GOOGL price target is $199.14, indicating a 15% upside potential over the next 12 months.
Alphabet's Moat Isn't Shrinking, It's Evolving
The narrative that Alphabet is in 'managed decline' strikes me as an overblown reaction to broader shifts in the tech landscape. In truth, Alphabet is actively leveraging its vast distribution network, proprietary data assets, and mature monetization infrastructure to carve out a defensible position in the evolving AI ecosystem.
Rather than showing signs of weakness, Alphabet is executing a strategic evolution—methodically and without premature fanfare. For long-term growth investors seeking both innovation and resilience, Gemini is a strong indicator that Alphabet remains a formidable force. It's not just keeping pace with change; it's positioning itself to deliver sustained, high-quality alpha in a rapidly transforming market.
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