ChatGPT has made headlines as a viral new technology. The chatbot using artificial intelligence (AI) can not only answer user questions with conversational replies, but it's also the fastest-growing app in history. Since launching in late 2022, ChatGPT has grown to 1.6 billion visitors in just months.
Microsoft has invested in OpenAI, the company behind ChatGPT, and integrated its technology into its Bing search engine, attacking Alphabet's (GOOG 0.74%) (GOOGL 0.55%) monopoly-like 93% market share on worldwide searches.
Are Google's days numbered? Here is what we know.
Microsoft Bing is on the offensive
Alphabet has owned the search engine market for nearly two decades, building its company on the ad revenue it generates when you search Google and click through the pages of linked results.
Alphabet does about $40 billion in search engine revenue every three months, and its overwhelming 93% share of worldwide searches means that Microsoft is almost locked out entirely.
But ChatGPT could threaten traditional search engines like Google, making the user experience feel antiquated. ChatGPT can pull information from the internet to provide conversation-like replies to just about any query, which removes the tedious process of scrolling through pages of results.
Microsoft relaunched Bing with ChatGPT-powered capabilities. CEO Satya Nadella noted on Microsoft's earnings call for the quarter ending March 31 that Bing had 100 million daily active users and that daily install rates quadrupled since the relaunch.
Whether Microsoft can maintain Bing's momentum remains to be seen. The company has been fishing for opportunities to displace Google, reportedly seeking discussions for search-engine rights with the web browser Firefox and smartphone manufacturer Samsung.
Alphabet's AI counterstrike
Search is Alphabet's golden goose; it pays the bills, generating more than half of the company's total annual revenue. The company was never going to sit back and let Microsoft disrupt its core business, and now it's pushing back.
Alphabet recently held an event that unveiled several AI developments and products coming to market. The company announced the planned integration of generative AI into Google search, allowing users to have a similar experience to ChatGPT. Google will also provide links within AI responses and suggest follow-up questions or steps.
Generative AI will also seep into Google's shopping features and integrate with Google Workspace so users can carry a search over from one app to another.
Alphabet has two decades of search engine data, an unmatched vault of information it can use to train its AI models. Microsoft moved first, but that doesn't mean it will win the war. Alphabet has years of Google branding, and users might not lose their "googling" habits easily. Improving the user experience with AI could strengthen its competitive advantages even further.
What should Alphabet investors do?
Time will tell whether Microsoft can dethrone Google, but such an uphill battle means that Alphabet investors should wait until there's indisputable evidence before panicking. Without market-share data showing the tide shifting, Google search seems just fine, especially with AI improvements on the way.
The initial news around ChatGPT pressured Alphabet's share price, but it has since recovered, and the stock is now up 32% since January. However, the stock still trades below its long-term average valuation at a price-to-earnings ratio (P/E) of 22.
GOOGL PE ratio (forward) data by YCharts.
Alphabet's Google is a great business, and while there is more commotion than in recent memory, AI's arrival could end up being a long-term benefit to the company and its shareholders.
