Alphabet (GOOG 0.87%) (GOOGL 0.75%) is often considered a safe blue-chip tech stock for long-term investors. But over the past 12 months, shares of the Google parent company declined by nearly 20% as investors fretted over the macroeconomic challenges for its advertising and cloud businesses.
Alphabet is now the cheapest FAANG stock at 19 times forward earnings, and I believe it still has a bright future if it can overcome its near-term challenges. But for now, the market will likely remain fixated on three bright red flags for its future: the rise of OpenAI's ChatGPT, its potential loss of Samsung to Microsoft (MSFT 0.43%), and troubling revelations regarding its dependence on Apple (AAPL 0.96%).
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1. Microsoft's investments in OpenAI
Microsoft has invested billions of dollars in OpenAI, the creator of the widely popular ChatGPT chatbot. Unlike Google's search engine, which requires users to browse through various websites, ChatGPT answers complex questions with a "generative AI" algorithm that crunches a wide range of data into simple answers.
ChatGPT poses a major threat to Google for two reasons. First, it undermines Google's advertising business, which relies on sponsored search results and display ads. If people simply use ChatGPT or a similar chatbot to answer their questions, they no longer need to browse the internet and view ads. Second, Microsoft is integrating ChatGPT into Bing -- which might help the underdog search engine finally gain ground against Google -- as well as its Azure cloud platform, which already controls a much bigger slice of the cloud market than Google Cloud.
Google is countering ChatGPT with its own generative AI chatbot, Bard. It plans to integrate Bard into its market-leading search engine, but it's unclear if this late response will adequately address all the long-term threats.
2. Samsung's possible switch to Bing
Samsung controlled 19% of the global smartphone market in the fourth quarter of 2022, according to Counterpoint, making it the second-largest brand after Apple, and the largest Android device maker by a wide margin. Samsung is such an important Android device maker that Google reportedly pays Samsung about $3.5 billion per year to remain the default search engine for its devices.
That's why Alphabet's investors were rattled when a recent New York Times report claimed that Samsung could replace Google with Bing as the default search engine for all of its devices in the near future. That move wouldn't be surprising, since Samsung already tried to reduce its dependence on Google by launching its own app store, cloud storage services, payment platform, and mobile OS (Tizen) over the past decade. It has also pre-installed Microsoft's productivity and cloud apps on some of its devices as alternatives to Google's apps.
By decoupling itself from Google, Samsung could potentially establish a third major mobile ecosystem alongside iOS and Android. Building a new search engine to complement that ecosystem would require some hefty investments, so it makes sense for Samsung to simply replace Google with the ChatGPT-enabled Bing. If those rumors are true, Google might be forced to pay Samsung a lot more cash each year to hold Microsoft at bay.
3. Apple could join that rebellion
Google also holds a similar deal with Apple. To remain the default search engine for all iOS devices, Google reportedly paid Apple nearly $15 billion in 2021 and $18 billion to $20 billion in 2022. But with all the recent buzz about Bing Chat (which is powered by the same tech as ChatGPT) and Samsung's rumored interest in walking away from Google, it wouldn't be surprising to see Apple join the revolt and strike a similar deal with Microsoft.
Like Samsung, Apple has been working more closely with Microsoft in recent years to bring its productivity and cloud-based services to iOS devices. Samsung and Apple produce more than 40% of the world's smartphones, so a loss of both of those partners would be a thesis-shattering setback for Google and a game-changing victory for Microsoft.
NASDAQ: GOOGL
Key Data Points
Should you avoid Alphabet for now?
Alphabet got complacent as Microsoft laid out a plan to disrupt the search engine market. But if Alphabet can get its act together and counter ChatGPT and Bing in a timely manner, I doubt Samsung and Apple will tightly tether themselves to Microsoft. Even if Samsung and Apple make Bing their default search engines, their users can still simply switch back to Google -- and Google would save billions of dollars in payments every year. Therefore, investors shouldn't ignore these red flags for Alphabet's near-term growth -- but I believe it can recover and prove the bears wrong over the long term.
