- Bernstein has argued that investors might raise concerns regarding the risks associated with fast AI investment.
- There are indications of increased investment in AI, which could put pressure on near-term earnings growth.
- While the AI-disruption narrative dominates the headlines, search has quietly been facing real competition, says the report.
Only yesterday, investment banking firm UBS Group AG expressed a cautious perspective on the search giant, citing concerns about the potential financial impact of the ongoing artificial intelligence revolution, and downgraded it to neutral.
The research points out three main reasons for the downgrade.
Bernstein maintains a cautious approach when a stock experiences a significant decline based on a questionable negative narrative (as observed after the ChatGPT launch in November). Similarly, it is wary when a stock surges based on a similarly dubious story (as seen after the annual developer conference in mid-May).
If Google search numbers were to be lower than expected in the upcoming 2-4 quarters, the research firm anticipates that investors might raise concerns once again regarding the risks associated with AI, and its impact on Google's dominant position in the search industry. Additionally the heightened regulatory scrutiny surrounding Google's search, and Network businesses cannot be overlooked.
Investors and analysts are now aligned with the expectations for Google's performance in 2023, and 2024. This means that there are fewer factors that can significantly impact the stock's movement going forward. Although there is optimism regarding the recovery of digital advertising, Google faces tougher competition in search compared to its peers.
Additionally, Google has already benefited from increased market share in digital advertising through Performance Max. The company is also aggressively incorporating generative AI into search results, which may temporarily affect the monetisation of search due to valuable space being utilised. Moreover, there are indications of increased investment in AI, which could put pressure on near-term earnings growth.
While the AI-disruption narrative dominates the headlines, search
has quietly been facing real competition for the first time in decades with Amazon's share gains overshadowed by Google benefiting from a pandemic pull-forward, and share gains from Apple's privacy-related changes. Retail media is expected to be the fastest growing sub-sector within digital advertising as everyone from Amazon to Walmart to Uber to Meta, and TikTok launch and scale search ad products.
However, the research firm mentions that they could be wrong, talking about the difficulty in betting against Google's search business, indicating its enduring strength. They believe that there might be flexibility in the cost structure, which could mitigate any margin pressure resulting from increased investments in AI. Furthermore, the growth of Google Cloud presents an opportunity for a potential revaluation of Google's stock, positioning the company as a prominent player in the AI field.