Alphabet's (GOOG -1.96%) Google search engine has dominated the competition. In fact, in 2021 the top search term on the Bing search engine, owned by Microsoft (MSFT -2.45%), was "google."
However, many investors wondered if Alphabet's reign was ending after Microsoft began rolling out new Bing features powered by OpenAI's technology (the makers of ChatGPT). So is this the case? Or can Alphabet still maintain its market position? Let's find out.
One mistake could prove costly for Alphabet
When Microsoft rolled out its new platform, Alphabet quickly responded by hosting its artificial intelligence (AI) event the next day. However, Alphabet's Bard technology made a blunder, which caused investors to panic and dump the stock. This caused Alphabet to lose over $150 billion in market cap in just under a week.
GOOG Market Cap data by YCharts
But this sell-off is way overdone.
Alphabet has been investing in AI technology for many years, and CEO Sundar Pichai started sharing his vision of Alphabet being an AI-first company over six years ago. Although Alphabet was beaten to the punch by Microsoft, it will be rolling out its AI for the general public to use shortly, which will allow further analysis of the tool.
It also invested in AI tools for developers as well as in its Google Cloud division, many of which are currently being used.
I'm confident in Alphabet's AI progress, even if it had a slip-up in its presentation. However, Alphabet must get this right, as search is a massive part of its finances.
The Google Search engine is a key part of Alphabet's finances
In Q4, Google Search brought in $42.6 billion in revenue, or 56% of Alphabet's entire revenue. Given how vital this segment is to Alphabet's financial health, management cannot afford to lose this AI-driven search engine battle.
Investors shouldn't be hopping off the Alphabet train just because of one event, especially since Alphabet and Microsoft's products aren't available to the general public yet. Furthermore, OpenAI's ChatGPT product that kick-started the race to roll out new and improved search engines is also known to make mistakes, so Alphabet's Bard product isn't unique in its blunder.
So is this sell-off a buying opportunity? After this quick drop, Alphabet trades for about 21 times earnings, a historically low value.
GOOG PE Ratio data by YCharts
Due to economic uncertainty, Alphabet is also dealing with a difficult advertising environment thanks to businesses tightening their ad budgets. If the economy continues to trend in a positive direction, Alphabet will likely see some improved advertising revenue signs by the end of the year, which could boost earnings.
Additionally, Google Cloud had the best quarter among the cloud computing providers, so this critical segment is continuing to do well and is nearing profitability.
Alphabet's investors should be concerned with the AI rollout, but not to a point where they are willing to sell. Alphabet must get this right, but for investors to call the war lost after just one presentation is far too quick of a reaction. Alphabet looks like a great buy after the recent sell-off, but investors will need to keep an eye on how its AI product is received when it officially launches.
