Why was Alphabet's stock just downgraded? An analyst sees six risks for Google.
By Emily Bary
One Rosenblatt analyst recommends that investors take a pause on Alphabet shares given changes around AI and the broader ad market
Over the past year and a half, analysts have debated Alphabet Inc.'s future in a world where artificial intelligence becomes more dominant.
So far, Alphabet's stock (GOOG) (GOOGL) has dodged concerns that the core Google search business faces revenue risk if people have their queries answered by AI assistants - including Google's own - rather than asking a traditional search engine and clicking on external links. Alphabet shares have more than doubled since the start of 2023.
But Rosenblatt Securities analyst Barton Crockett thinks investors should now take a pause. Citing "multiple areas of transitional risk," he downgraded Alphabet shares to hold from buy on Friday and recommended "stepping back for a little while to see how the company handles" various changes in the market.
Shares of the Google parent company are down fractionally in Friday's premarket trading.
Read: Who is Anat Ashkenazi, the Eli Lilly veteran becoming Google's next CFO?
Crockett flagged that Google has been pushing its AI Overviews, which give conversational answers to questions that users type into its search product. "The obvious risk is that, at launch, ad volume in AI Overviews is limited, while click driven search revenue in some instances is lessened, as links lose prominence," he wrote, though the company has room to ramp the ad load in time.
While users seem to like AI Overviews, Crockett said the new format "presents a transitional risk of ad slowdown near-term, akin to what Meta went through with Reels."
He also pointed to "nascent evidence of search share loss to Bing," which is the rival search engine from Microsoft Corp. (MSFT)
Crockett has some concerns about the future of search-ad revenue for non-AI reasons as well. For instance, he noted the rise of "retail media," with e-commerce powerhouses Amazon.com Inc. (AMZN) and Walmart Inc. (WMT) both sporting sharp recent growth in advertising revenue.
Another ad risk stems from Amazon's "aggressive entry" into video advertising, as the default Prime Video offering now comes with commercials. This could have repercussions for Alphabet's YouTube business, according to Crockett.
Don't miss: Why Google is one of the big winners from Apple's WWDC
He noted that Alphabet's search business is up against tougher comparisons in the second half of the year. "We see risk investors worryabout competitive dynamics driving that even if a 2H24 search slowdown is largely comp driven," Crockett said.
Finally, he mentioned that Alphabet could wind up in a "higher-than-anticipated [capital-expenditure] spending cycle for AI" as companies feel competitive pressure to ensure they're well positioned on the technology.
-Emily Bary
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
06-28-24 0925ET
Copyright (c) 2024 Dow Jones & Company, Inc.-
Six Sports Betting and iGaming Stocks Trading at a Discount
-
4 Predictions for Stocks and the Economy for the Second Half of 2024
-
What Broadening Rally? AI Stocks Dominate Again In Q2
-
After Earnings, Is Nike Stock a Buy, a Sell, or Fairly Valued?
-
Worst-Performing Stock ETFs of the Quarter
-
Top-Performing Stock ETFs of the Quarter
-
Q2 In Review and Q3 2024 Market Outlook
-
5 Stocks to Buy for 3Q 2024
-
Industrials: Sector Offers Investment Opportunities as Performance Lags Broader Market
-
Consumer Defensives: Even Amid Macro Pressures, Deals Permeate the Landscape
-
33 Undervalued Stocks
-
Utilities: Can the Stocks Keep the Rally Going?
-
Basic Materials: Following Index Decline, We See Many Long-Term Opportunities
-
Healthcare: Valuations Look Attractive In Most Industries
-
Financial Services: Amid Uncertainties, We See the Most Value In Banks and Credit Services
-
Consumer Cyclicals: Even With Anxiety Over Spending, We See Attractive Valuations