Last updated: June 27, 2023 at 7:56 am ET
Initial publication: June 26, 2023 at 10:17 pm ET
Bernstein analyst Mark Shmulik likens Alphabet Inc. stock to feeling like a “warm hug,” but is willing to ditch the hug for now.
“Again and again [the] “Equities appear to be just as fairly valued as they are today, with a balanced risk/reward trade-off and a narrative that has quickly caught up with fundamentals” and stocks up about 40% since their November bottom. With that in mind, he downgraded Alphabet on GOOG GOOGL stock to Market Performance from Outperform late Monday.
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Bernstein analyst Mark Shmulik likens Alphabet Inc. stock to feeling like a “warm hug,” but is willing to ditch the hug for now.
“Again and again [the] “Equities appear to be just as fairly valued as they are today, with a balanced risk/reward trade-off and a narrative that has quickly caught up with fundamentals” and stocks up about 40% since their November bottom. With that in mind, he downgraded Alphabet on GOOG GOOGL stock to Market Performance from Outperform late Monday.
Shmulik’s concerns include that Google’s parent company has gone “from too slow to too fast in AI.” Earlier this year, investors were concerned that Alphabet wasn’t doing enough on AI to partner with Microsoft Corp. MSFT, which won the battle for public opinion thanks to its partnership with ChatGPT developer OpenAI. But now that Google plans to integrate AI into its own search product, Shmulik worries the company could end up eating up its own bread-and-butter advertising business.
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“Google has been aggressively launching Gen AI products and has begun to integrate Bard into Google search results,” he wrote, referring to the company’s Bard AI assistant. “Google risks creating a near-term revenue stream by cannibalizing prime real estate for its Gen AI results, which will take time for ad buyers.”
Those concerns have been resonating on Wall Street lately as Alphabet’s shares have surged, echoed UBS analyst Lloyd Walmsley in a downgrade on Monday.
Of course, investing in AI comes at a cost.
“Google faces a particular risk associated with protecting its search business from potential challengers and developing new GCP-related opportunities,” Shmulik wrote, referring to Google Cloud Platform. “Also, Google has been far more conservative on cost cutting relative to its peers over the past nine months, which likely leaves less room to meet investors’ margin growth expectations.”
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Shmulik also worries about the competition.
“Google’s position in the search market is increasingly at risk,” he said in his customer announcement. “We’re seeing the rise of retail media, the dollar shifting back up to meta, the shift in consumer behavior toward industry-specific searches, the convergence of commerce and search ad dollars, and some near-term AI-related monetization risks, all of which are contributing to Pressuring Google.” Addiction growth.”
He considers that Amazon.com Inc. AMZN sits atop a $40 billion digital advertising company that is increasingly competing with web search for advertising revenue.
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He also sees a stubbornness in the online media landscape, as traditional advertising dollars continue to move slowly to platforms like YouTube. “We’ve also seen the mobile portion of YouTube’s advertising business face material competition from TikTok, which increasingly suggests a ban isn’t materializing anytime soon.”