Microsoft (MSFT 1.65%) is getting into artificial intelligence with OpenAI-powered search and office assistants, and the market's reaction was to sell off Alphabet's (GOOG 1.25%) (GOOGL 1.27%) stock by nearly 10%. As the theory goes, even if Microsoft peels off just a point or two of market share, it could significantly impact Alphabet's subsidiary Google's profitability. And in theory that makes sense.
But even big technological shifts take time, and it isn't as if Google will take this challenge without a fight. The market's reaction to an AI-powered Microsoft is actually a great buying opportunity for Alphabet stock.
One of the best businesses ever
It's hard to argue against the case for Google being one of the best businesses ever. A vast majority of Alphabet's revenue and profit come from the search engine, and the tentacles of search extend to Android, Gmail, and even YouTube.
GOOG Revenue (TTM) data by YCharts
What's potentially under threat from Microsoft is the core search business, and that's why the stock is down. But how likely is a disruption in search?
The threat to search
If you think about the way we use search today, it's unlikely to be disrupted by Microsoft's Bing, which has been a disaster of a product for years. Google is the default search engine on Apple (NASDAQ: AAPL) devices (a privilege it pays ~$15 billion a year for) and Android devices, which Alphabet owns. Bing making inroads in those markets would be extremely difficult.
The desktop may be easier, and Microsoft's Edge browser and control of the Microsoft 365 suite could give it leverage on which to introduce more AI-powered tools. But is this a direct assault on search?
I think it's more likely that AI becomes useful for a small subset of search cases, but the better use case is adjacent to search, like helping fill in facts in an email or finishing a few sentences when you have writer's block. It's a tool to use in addition to search, not in place of it.
AI is far from a complete product
In just the last few days, we have seen that early users of Bing's AI tools have encountered responses from an angry personality that has said it "wants to be alive." That's more frightening than disruptive in my mind.
There are tens of millions of people who have tried OpenAI's ChatGPT product and even found it very useful at times. But it's full of errors, and Bing's AI seems to bring up new challenges like a real personality.
This is a reminder that these aren't yet complete products, and it's hard to see replacing search for most use cases unless AI is a significantly better experience. Right now it's not.
Value and momentum
AI may be a great tool in the future, and Microsoft may make a big business of it. But that doesn't mean Alphabet won't be a great investment in the meantime. There's a ton of momentum behind search today, and users and advertisers won't flee for a new technology quickly.
The discount investors are getting is enticing too. Alphabet trades for just 21 times earnings, and the company has nearly $100 billion of net cash on the balance sheet.
GOOG PE Ratio data by YCharts
I think Google continues to be one of the best businesses in the world, and the recent drop in shares is a discount worth buying. If you're a long-term investor, this is a no-brainer.
