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There has been an element of doubt hanging over Alphabet (NASDAQ: GOOG) shares ever since ChatGPT was unleashed in late 2022. That might sound strange given that the stock has roughly doubled since then, handily beating the S&P 500.
Yet, despite this rise, it has consistently traded at a discount compared to other Big Tech stocks and the wider market. And it’s lagging the S&P 500 year to date.
One reason for this relative underperformance is that some investors fear Google’s search empire could start cracking as people use AI chatbots to answer more queries. In other words, AI is changing how people find info, and that threatens Google’s lucrative ad-driven model. In theory, at least.
Alphabet just reported Q2 earnings today (24 July). Are we seeing signs of ChatGPT disruption?
Canary in the coalmine
The short answer is no. I don’t see any fundamental weakness developing yet.
If ChatGPT and other AI bots were successfully disrupting the Alphabet empire, the first figure I’d expect to dramatically weaken would be Google Search & other. This line reflects revenue from Google’s core search product (text ads, shopping, etc.).
But this showed revenue rising from $48.5bn to $54.2bn, representing year-on-year growth of 12%. That’s impressive double-digit growth!
Another canary in the coalmine might be notable declines in Google Network revenue, which comes from third-party websites that use Google’s ad tools. If AI chatbots reduce web traffic across the internet, publishers would presumably get fewer eyeballs, leading to fewer ad impressions and clicks.
However, this revenue held pretty steady at $7.35bn (a 1.2% decline). But this part of the business is more mature and I don’t see it as a significant part of the overall Alphabet growth engine.
Indeed, as Google prioritises AI Overviews and AI Mode in search results, both of which offer AI-powered summaries for various queries, Network growth will probably be sacrificed.
Upping AI spend
Elsewhere, things were humming along very nicely, with YouTube Ads up 13% to $9.8bn. Google Cloud revenue surged 32% to $13.6bn, with operating income more than doubling to $2.83 bn. That’s a revenue acceleration from Q1 (28%).
Earnings per share came in at $2.31, beating expectations for $2.18.
CEO Sundar Pichai commented: “We had a standout quarter, with robust growth across the company. We are leading at the frontier of AI and shipping at an incredible pace. AI is positively impacting every part of the business, driving strong momentum.”
Given this AI momentum, the firm said it expects to invest $85bn in capital expenditures this year ($10bn higher than previously guided). And increases are expected in 2026.
Cheap stock
One key risk is the US ruling that found Google to have an illegal monopoly in search. We should find out pretty soon what will happen here. A forced sale of the Chrome browser could hurt search volume and ad revenue severely.
My view is that Alphabet is deftly handling this major potential disruption to its core business. However, the market doesn’t seem to be rewarding it. As I type, the share price is up just 1.5% to $194.
I already have a lot of exposure to Alphabet through index funds and investment trusts, so I won’t be buying. But with the stock trading cheaply at less than 20 times forward earnings, I think it’s well worth considering.
