Google parent Alphabet’s stock hit with two downgrades this week
Shares of Google parent Alphabet (GOOG, GOOGL) might be up 34% year to date, but analysts at both Bernstein and UBS (UBS) are cooling on the company’s near-term prospects, downgrading their ratings for the search giant’s stock.
UBS analyst Lloyd Walmsley downgraded Alphabet from a Buy to Neutral, while Bernstein’s Mark Shmulik rerated the stock from Outperform to Market-perform.
“At the heart of it, the risk-reward looks better to us at Meta (META) and Amazon (AMZN),” Walmsley told Yahoo Finance Live on Tuesday.
“Google, what they’re doing is kind of investing to stay in the same place. There may be some offensive side to it over time, but in the near term, there could be some headwinds,” he added.
In his research note, Shmulik said Alphabet’s “narrative has caught up with the fundamentals.” In other words, the stock is priced to match the company’s current performance and outlook. He also raised concerns about the way market sentiment went negative on the company after OpenAI announced ChatGPT in Nov. 2022 only to turn positive when the tech titan debuted its own generative AI software in May.
“What do we imagine would happen then, in any of the next 2-4 quarters, if Google Search numbers were to come in 'soft'? We imagine investors may once again ring the alarm bells around AI-related risks to Google's Search moat,” Shmulik wrote.
The analysts also pointed to Google’s Search Generative Experience (SGE) as a potential headwind for the company’s search advertising business. SGE is Google’s experimental generative AI-powered search platform. Like Microsoft’s Bing, it uses generative AI to provide users with answers to specific queries. The problem, the analysts say, is that the generative AI responses occupy screen space that is currently used to serve ads on the normal Google Search page.
“We recognize that [Google’s] SGE roll-out is still in its very early stages (limited beta in US only), with the integration of ads still being figured out,” Walmsley wrote in a research note. “But our initial testing of SGE shows material changes to [search engine results page] vs. the ‘old’ Google…which we see as demonstrative of the potential disruption to Google's well-oiled Search monetization machine.”
Google is also increasingly facing challenges from the likes of Meta and Amazon in the digital advertising space. TikTok is also quickly playing a larger role in the industry. Increased spending on generative AI technologies could also cut into Alphabet’s margins.
The company is also staring down a slew of regulatory challenges including calls by the European Union’s European Commission to break up Google’s massive advertising business, which the commission says violates antitrust laws.
Here in the US, the Department of Justice and a number of state attorneys general are already suing to break up Google’s ad business.
Daniel Howley is the tech editor at Yahoo Finance. He's been covering the tech industry since 2011. You can follow him on Twitter @DanielHowley.
Click here for the latest technology business news, reviews, and useful articles on tech and gadgets
Read the latest financial and business news from Yahoo Finance
