Alphabet‘s (GOOG 1.16%) (GOOGL 1.32%) shares are down by 12% this year, partly due to being swept up in broader market volatility. However, the company has faced issues of its own. The stock could remain volatile in the short run, and developments could disrupt the company’s dominance in the search engine niche.
Despite these challenges, Alphabet remains an excellent stock to buy while its shares are down — and to hold on to for a while, even with a market capitalization of about $2 trillion. Let me explain.
Image source: Getty Images.
Is Google’s near-monopoly in danger?
One development that’s weighed on Alphabet’s shares recehtly is the growing fear among investors that artificial intelligence (AI)-powered search engines will eventually replace Google and topple the company’s dominance in this field. Recent court testimony from an Apple executive, Eddy Cue, suggests that the iPhone maker wants to add AI-based functionalities to its Safari browser search option. And that could be just the beginning of Alphabet’s troubles, or so the argument goes.
It’s worth pointing out that this line of thinking isn’t new. When ChatGPT first made its grand entrance, the market reacted similarly and sold off Alphabet’s shares. Many thought AI would be a net negative to the tech giant. Further, Microsoft even added AI capabilities to its search engine, Bing. All the noise ended up being just that: noise. Alphabet responded by launching ChatGPT alternatives. Although the company’s early attempts were not as good as its main competitor’s, the move showed that Alphabet was not that far behind.
Alphabet also added an AI overview to its Google search results, with some success. In the meantime, AI-infused Bing did little to challenge Google, and Alphabet has become a leader in providing AI services through the cloud. ChatGPT was released in late 2022. Here’s how Alphabet has performed since early 2023 compared to the broader market.
GOOG data by YCharts
Alphabet’s strong brand name in the search engine market, massive market share (in the neighborhood of 90%), and innovative abilities should allow it to remain a leader in search, no matter what happens next with this industry. Even if AI-based search is the new norm, one that carries the company’s famous brand name should immediately become far more attractive to users. So, investors have little to worry about here.
There are multiple growth paths for Alphabet
Alphabet’s existing dominance in the search engine market helps it generate the bulk of its sales through its advertising business. However, the company has other significant growth opportunities that will serve one major purpose beyond helping it improve its revenue and earnings; Alphabet will be able to decrease its reliance on its primary source of revenue.
One of these opportunities is cloud computing. Google Cloud is one of the “Big Three” in this field. It’s been a rapidly growing segment for Alphabet in recent years, and the good news is, there is still massive white space ahead. Amazon CEO Andy Jassy recently said, “More than 85% of the global IT spend is still on premises, so not in the cloud yet.”
That’s despite the massive advantages the cloud brings, from improved productivity and cost efficiency. Translation: We are still in the early innings of this industry’s growth story. Alphabet is in pole position to benefit from the white space available. AI-focused services are only making the company’s cloud business better. Another key growth avenue for Alphabet is streaming, where it is also a leader thanks to YouTube.
YouTube and Google Cloud have a combined annual run rate of $110 billion. That’s about 31% of the company’s 2024 annual revenue of $350 billion. Expect these two units to continue to make headway. Lastly, don’t discount Alphabet’s other potential opportunities, including its self-driving car company through its subsidiary, Waymo. Perhaps that looks like a longshot for now, but autonomous vehicles are slowly gaining traction in major cities such as San Francisco.
Waymo is one of the leaders here, and its parent company, Alphabet, could be a major winner if self-driving cars become far more widespread. Even without that, Alphabet’s business has excellent long-term prospects. So, despite the company’s poor performance this year, it’s worth investing in its shares.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Prosper Junior Bakiny has positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, and Apple. The Motley Fool has a disclosure policy.