Alphabet (GOOG 0.57%) (GOOGL 0.51%) has suddenly become one of the biggest battleground stocks on the market. The emergence of ChatGPT has created a threat unlike Google has ever faced as its conventional web-crawling search engine could soon be disrupted.
The stock has fallen since Microsoft (MSFT 1.21%) introduced a new ChatGPT-powered version of Bing. It also took a hit after investors were disappointed with the unveiling of Bard AI, which made a factual error in the presentation.
Following the sell-off, a number of investors see opportunity in Alphabet stock, but can it fend off the challenge from Microsoft? To answer that question, we asked a bull and a bear to debate this top tech stock.
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Alphabet makes billions in profits by offering free products
Parkev Tatevosian: My bull case for Alphabet stems from its ability to make hundreds of billions in revenue by offering free products and services to customers. Google search, Youtube, Gmail, etc., are all free to use, yet Alphabet has turned them into cash-generating machines. Consumers flock to use the helpful services because of the astounding value proposition -- free is an excellent price -- and Alphabet capitalizes on the mass attention to sell advertising.
Merchants, for their part, appreciate the opportunity to influence the purchasing decisions of billions of people. That can partly explain why Alphabet's revenue has soared from $55.5 billion in 2013 to $282.8 billion in 2022. More importantly, Alphabet has increased its operating income from $15.4 billion to $74.8 billion during that same time.
Microsoft is threatening to take market share in search with its game-changing incorporation of ChatGPT. The generative language model infused with artificial intelligence promises better search results.
The competitive threat has caused Alphabet's share price to fall in recent days, arguably more than pricing in the risks of lost market share. Investors can buy Alphabet stock at a price-to-earnings ratio of about 21, near the lowest it has sold for all decade. In my opinion, that's a bargain valuation for one of the best technology stocks in the market.
ChatGPT isn't the only problem
Jeremy Bowman: By now, most investors are aware of the threat represented by OpenAI's ChatGPT, which sparked a "code red" at Google headquarters and seems likely to disrupt search as we know it. While that's a serious problem and deserves investor attention, there are other reasons to stay away from Alphabet stock.
First, its management team not only seems to be struggling to meet the moment but has also failed for several years to deliver another significant profit stream to complement its massive advertising business. Google Cloud launched in 2009 but continues to lose billions of dollars a year, while rivals like Microsoft and Amazon make huge profits from their respective cloud infrastructure businesses. Its other bets have also failed to yield a winner even as the company rebranded from Google to Alphabet nearly eight years ago, signaling it was more than the Google family of products.
Additionally, Alphabet's revenue growth has stalled due to a challenging macro environment, but even when the economy improves, growth may not return to its former level. The digital-advertising market is maturing, and newer advertising channels, like Connected TV, are emerging and taking market share from search.
Finally, the biggest risk from ChatGPT may not be that Alphabet loses market share, but that it has to spend more to defend it, taking a big bite out of profits. Running the computing power to make large language models like ChatGPT can be costly, and it could also disrupt Google's traditional model of placing ads at the top of searches as a chat-driven search would lend itself to a different kind of interface.
Overall, Alphabet is facing a number of risks, and its profits are falling as revenue growth has slowed significantly. With the rise of ChatGPT, there's a good chance the company's best days are behind it. That explains why the stock looks cheap but could still fall a lot further from here.
