Google is more resilient than its AI stumbles imply

The high-profile launch in February of its latest AI tool known as Gemini was bungled by instances of the chatbot producing false historical images in response to user queries. (Image from Google)
The high-profile launch in February of its latest AI tool known as Gemini was bungled by instances of the chatbot producing false historical images in response to user queries. (Image from Google)

Summary

Google’s stock has lagged behind other tech giants even as its search business proves resilient to AI incursions.

Google hasn’t been clicking with investors lately. They should keep in mind how the company still pays its bills.

Alphabet Inc., Google’s parent company, saw its share price rise 8% during the first quarter. That lagged behind the gains of the S&P 500, Nasdaq Composite and most of the company’s trillion-dollar Big Tech peers for the second quarter in a row, according to FactSet data. The stock is up 15% over the past six months; digital advertising rival and Facebook-parent Meta Platforms has surged 62% in that time, thanks in part to an ambitious cost-cutting program that has so far dwarfed what Google has undertaken.

Google’s recent weakness has come as the company has faced a seeming barrage of bad news. A trial stemming from the Justice Department’s antitrust lawsuit against the company took up several weeks during the fall of 2023, and left Wall Street with a growing worry of a bad outcome that could include steep financial penalties and even a breakup of the business. “The DOJ case vs. Google Search has been more compelling than we thought," a team of Bernstein analysts wrote in an early November report, adding that the odds of an adverse ruling “may be under-appreciated by investors." Closing arguments in that case will take place next month, with a ruling likely sometime later this year.

Google’s momentum in the race over generative artificial intelligence has also been a cause of worry. The high-profile launch in February of its latest AI tool known as Gemini was bungled by instances of the chatbot producing false historical images in response to user queries. And the recent financial results of Google’s parent have disappointed investors, comparing poorly to those of its arch-AI rival Microsoft that are now typically released on the same afternoon. Alphabet’s stock fell 8% and 10% respectively on the day following its last two quarterly reports.

Investors are understandably angsty about generative AI. Building such capabilities requires a huge upfront investment in computing infrastructure; analysts project Google’s capital expenditures will jump 33% this year to a record just under $43 billion, according to FactSet estimates. And recent results from companies such as Adobe have suggested consumers and business users aren’t yet rushing in to pay premium prices for AI tools.

Also, the growing popularity of online chatbots such as OpenAI’s ChatGPT and venture-backed Perplexity has left the question open of how such tools will ultimately affect internet search—Google’s core business. Perplexity was valued at $1 billion in its most recent funding round in March—nearly double its valuation from just four months prior, according to PitchBook data.

But AI chatbots now aren’t such a new, new thing. ChatGPT launched in late 2022 and the technology was aggressively embraced by Microsoft, which added it to its Bing search engine a year ago. That hasn’t exactly been fatal for Google, which powered a little over 91% of the global search market in March, according to data from Statcounter. That is only slightly below the 92% share it has averaged annually over the last five years. Analysts expect Google’s total advertising revenue to rise 10% to about $261 billion this year following two years of single-digit growth.

YouTube is picking up even more, thanks both to its own recovering ad growth and other sources, such as premium and music subscriptions. Michael Nathanson of MoffettNathanson estimates YouTube generated total revenue of $45 billion in 2023, which would reflect a contribution of more than $13 billion from nonadvertising buckets. “If YouTube was a stand-alone business, public comps suggest the business would be worth $375 to $400 billion," he wrote in a report last week.

Google will be hitting the AI message hard over the next couple of months. The annual conference for its growing cloud business, called Next, takes place next week while its flagship I/O developers conference is scheduled for May 14. Meanwhile, parent Alphabet is trading at less than 23 times forward earnings—the cheapest of any of the big techs including Apple, which has seen its stock price slide 12% this year. “We believe Google has all the ingredients to rebound," Brent Thill of Jefferies wrote in a report last week. A little AI shine could go a long way.

Write to Dan Gallagher at dan.gallagher@wsj.com

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