The Google search bears, fearing a near-term clobbering from generative A.I., have spoken.
Google-parent company Alphabet was socked with a one-two punch of downgrades from Wall Street analysts this week, as UBS AG and Bernstein both warned of the near-term threat that generative AI poses to Google’s lucrative search advertising business.
In a lengthy, 39-page report Monday, UBS said that the advent of A.I.-based search—from rivals like Microsoft and OpenAI’s ChatGPT as well as Google’s own Bard product—will significantly change the way consumers find information on the web and the way that businesses reach customers with search ads.
“It is possible that people will come up with creative solutions to include sponsored links in the answers, but the click-through rate will be substantially less than what would have happened with the previous 10 blue links ad model," the UBS report says, quoting an unnamed former Google SVP of Ads & Commerce that its analysts spoke with.
“With time Google can figure this monetization out,” the UBS analysts opined, noting that they do not consider the shift to A.I. search as jarring as the transition from desktop PCs to smartphones that Google successfully navigated a decade ago. But the upshot for now, UBS said, is disruption to the “well oiled search monetization machine,” as well as pressure on Google’s profit margins from its increased spending on A.I.
UBS downgraded its rating on Alphabet’s stock to a Neutral in Monday’s note, with Bernstein analysts following suit on Tuesday, and lowering their rating from Market Outperform to Market Perform.
Shares of Google are down more than 3% this week, while the broader market has posted slight gains.
Alphabet’s image suffered another setback late Tuesday when the Wall Street Journal reported on a study that claimed major problems with Google’s business serving video ads on third-party websites. According to the research by brand marketing analysis firm Adalytics, 80% of the ads delivered by Google violated the company’s standards regarding the quality of websites in the ad network and other criteria. A Google spokesperson told the WSJ that the study “makes many claims that are inaccurate.”
In its downgrade of Alphabet's stock on Tuesday, Bernstein analyst Mark Shmulik warned that the company's “aggressive push to integrate generative A.I. into core search results could create a near-term air pocket on search ad pricing.”
It’s time to move to the sidelines, Shmulik advised investors, noting that said that Alphabet went “from too slow to too fast in AI."
The comments underscore the challenging balancing act for Alphabet, which must keep up with competition in search from Microsoft and OpenAI, without rocking the boat so much that it causes problems in its search advertising business.
Alphabet CEO Sundar Pichai has even said the company is prepared for the pending inflection point, telling Bloomberg that Google is more ready for the shift to AI than it was for mobile. And at the Google I/O developer conference, the company saw positive feedback for the introduction of new AI tools, with the Motley Fool reporting that the event “reestablished the company as a top AI company.”
A recent survey from the Bank of America found that while ChatGPT has already been used by more than half of U.S. internet users, four out of 10 people surveyed say they now use search chatbots offered by Google and Microsoft several times a week.
The survey is from a BofA report that also says Google might just benefit from the generative A.I. wave. “We think LLM usage can be incremental to core search,” according to the Bank of America analysts, who have a buy rating on Google’s stock.
