AI is changing the lucrative search business. Here's how to pick the winners — and avoid the losers

CNBC

3 days ago

Concerns over a potential plunge in web traffic due to artificial intelligence — and its impact on many businesses — may have been overblown. The proliferation of artificial intelligence tools in web navigation have raised concern that Google, as well as companies that rely on consumers reaching them through search results, could see their business take a hit. A study by the Pew Research Center found that users who encounter an AI summary when searching are about half as likely to click on a traditional search result than those who aren't met with one. Another survey from Bain found that 80% of consumers have come to rely on these "zero-click" results in at least 40% of searches — reducing organic web traffic by approximately 15%-25%, Bain said. But investors may be overestimating the hit these companies will take due to this shift. "The death of search is greatly exaggerated," Wedbush Securities analyst Dan Ives told CNBC. He pointed to Google-parent Alphabet 's latest quarterly figures as a sign that search remains strong. The company's second-quarter earnings and revenue, released July 23, beat analyst expectations. Its search engine business also raked in $54.2 billion in sales , while advertising revenue expanded by 10% to $71.3 billion. GOOGL 1M mountain GOOGL in past month "Alphabet continues to defy the bears, just like this last quarter, and all of our survey data shows that search continues to be pretty robust from a query perspective," said Ives. "Now, AI is clearly a near-term potential headwind for Google, but we actually believe they turn it into a talent." Ives believes that Google — as well as rivals such as Meta Platforms — will learn how to monetize AI search. "Google's key KPIs (traffic, search share, & mobile DAUs) were relatively stable in July, despite rapidly growing AI adoption across several sites, including Gemini. Data suggests AI-driven usage appears incremental, with growing adoption complementing, rather than significantly altering existing search activity," Bank of America analyst Justin Post wrote in a Tuesday note. "We think Street could be underestimating AI driven upside potential for Google search and YouTube monetization. That's not to say all companies will be left unscathed by the rise of AI search. The potential losers While it's hard to pinpoint just exactly how this will affect business' bottom lines, Barclays anticipates that the impairments will begin to emerge more clearly from here. "Over time, as search referral traffic declines, companies are faced with a challenging situation whereby they can: 1) maintain profit margins while watching their top line decelerate or decline, or 2) supplement the loss of search referral traffic by spending more on customer acquisition across paid channels, which would compress margins but keep growth rates consistent," the bank wrote in a July note to clients. "In general, we view that neither of these are contemplated in the current consensus estimates over the medium term." Barclays found that companies that rely more on web traffic from search results versus direct traffic are more likely to face a larger disruption. Direct traffic refers to instances where users directly type in a website into their URL address bar or access a website through non-search traffic channels such as social media. For instance, at just 29%, TripAdvisor has much lower direct traffic mix than Airbnb . Therefore, between the two companies TripAdvisor might be faced with a larger disadvantage. The chart below shows a website's direct traffic mix as a percentage of its total. The further right the company is, the more insulated it might be from the rising threat of AI to searches. Robert Pavlik of Dakota Wealth Management highlighted the following as stocks that could be negatively impacted by AI search: eBay , NerdWallet , Wayfair , Booking Holdings, Airbnb and Chegg . Wedbush's Ives believes that a site like Expedia Group has disproportionately more headwinds when compared to one like Booking Holdings . That's because demand trends for Expedia have weakened, while the site is much more exposed to advertising trends, he said. Still, both Pavlik and Ives remain think the impact from AI on search will not be as negative as the Street expects. Pavlik pointed out that while AI can help summarize search results, users will eventually have to click through to a site if searching for a product. "Those general searches are probably going to be the ones that upset these companies going forward," he added. "But even AI will have to direct you somewhere. ChatGPT doesn't sell you a chair for your living room, so probably will have to direct you to a site some way." Ives even highlighted Pinterest as a stock he's bullish on amid the shifts in search. "Just because the newer initiatives on modernization and engagement — I think the Street is underestimating what that's going to look like," he said.