Alphabet’s stock may look cheap, but investors may want to think twice about buying it.
Alphabet (GOOG 2.23%) (GOOGL 2.33%) has built its business around two high-prized assets over the years: YouTube and Google Search. The latter, however, is facing some significant headwinds right now. Regulators have been taking a hard look at its dominance and recently found that it acted as a monopoly.
And with a rise in artificial intelligence (AI) chatbots, there may be less of a reason for people to rely on search engines at all. While the transition may not be instantaneous, there could already be a sign that Alphabet’s business may be in trouble.
More users appear to be turning to ChatGPT for answers
According to a recent survey conducted by investment banking firm Evercore that involved 1,300 Americans, 8% said they are using ChatGPT as their go-to search engine. That’s up from just 1% a few months earlier. Google Search remains the leader with 74% of surveyed users relying on its results, but that is down from 80% in the earlier survey.
There’s not necessarily a cause for alarm as Google firmly remains the top choice for many users. And an uptick in interest in ChatGPT may still not be a concerning trend for the business. ChatGPT has been around since November 2022, and if its share of search was around just 1% recently, that suggests it hasn’t been taking a whole lot of traffic from Google despite its soaring popularity.
While the recent increase in people opting to use the chatbot rather than Google Search is not a good sign for Alphabet, it may not necessarily be indicative of a problematic and long-term trend — at least not yet.
But the risk, however, is real. Chatbots like ChatGPT can potentially divert traffic away from Google Search. If people can get answers through a chatbot, Google’s search engine may not be nearly as valuable as it once was. That can be a problem for marketers who buy ads on Google Search, as it can mean they’re getting less value for their ad spend. That, in turn, can lead to less demand and slowing growth for Google in the future.
This isn’t a problem Google has had to worry about in the past
Whether it’s ChatGPT or another chatbot, the danger for Google is that it may finally have some real competition to worry about now. Its position in search has been so strong that a U.S. judge ruled last month that the company had a monopoly on it. According to data from statcounter, Google accounts for 90% of the search engine market share, and Microsoft‘s Bing comes in at a very distant second place with just a 4% share of global searches.
Moving forward, however, as chatbots become more prominent, the playing field could intensify. While Alphabet has its own chatbot, Gemini, it will have to compete with several chatbots, including not just ChatGPT but Microsoft’s Copilot, Meta AI (from Meta Platforms), and others.
It may be tougher than ever for Alphabet to still dominate on search not only due to the possible consequences from the recent antitrust case, but also given the role that AI chatbots may play in the future; there’s no reason to expect that Gemini will dominate as a chatbot the way Google has dominated as a search engine in the past.
If Google’s search dominance is in doubt, that could drastically impact Alphabet’s long-run growth prospects because of how dependent it is on searches. Revenue from Google Search and related properties totaled more than $48.5 billion in Alphabet’s most recent quarter (which ended on June 30), accounting for 57% of its top line. If there’s a noticeable decline in that figure, that could spell trouble for the tech stock.
I’d avoid Alphabet’s stock despite its seemingly low valuation
Alphabet looks like a cheap stock to buy — it trades at just 22 times its trailing earnings. But if its earnings decline in the future because it’s no longer able to dominate in search queries, that multiple could quickly become a lot higher. Plus, with the economy potentially entering a recession in the near future, spending on ads could also start to slow down.
Meanwhile, its antitrust problems aren’t over by any means. Investors have yet to learn what the fallout will be from the ruling related to its monopoly on search, and a new trial has begun this month to look at whether Google’s advertising technology also gave it an unfair advantage.
Although it may seem like a bargain buy, Alphabet’s stock is trading at a discount for good reason — there’s a fair amount of risk with the business in both the short term and the long run. Unless you’re a contrarian investor and have at least a moderate risk tolerance, you may be better off pursuing other growth stocks instead.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
