Alphabet (GOOGL -0.82%) (GOOG -0.77%) has been in the news a lot lately, as is usually the case with the biggest tech companies. Its business has undoubtedly faced a painful slowdown in recent quarters as the complex macroeconomic picture has dried up demand in the digital advertising market. But because of its outstanding return of 127% over the past five years, Alphabet remains a popular ticker for investors.
However, it's always a good idea to understand the entire situation. Let's take a closer look at both the bear and bull arguments for this FAANG stock.
The bear case is clear today
Artificial intelligence (AI) has easily been the most popular topic of discussion in the corporate world over the past several months, in particular, ChatGPT, which was recently integrated into Bing, the search engine owned by Microsoft. Beyond the threat that Google Search, Alphabet's bread-and-butter product, could lose a significant slice of its dominant market share to an AI-enhanced Bing, the new technology also calls the long-term economics of the search ad business into question. If users can simply ask questions and have AI tools provide them with single answers, there will be less opportunity to display digital ads as paid search results. This would deal a huge blow to Alphabet's crown jewel business.
Moreover, there have been reports that Samsung, which has a 20% share of the global smartphone market, plans to switch the default search engine on its devices from Google to Bing. This would translate to less usage of Google Search, further diminishing its ad revenue. Alphabet already pays Apple $20 billion a year to make Google the default search engine on iPhones, indicative of how important it is to be front and center for consumers on their smartphones.
The final piece of the bear argument rests on Alphabet's shrinking position in the digital ad market. According to data provided by Statista, Alphabet commanded 28% of the worldwide market last year, down from 30.2% in 2017. Over that time, companies like Meta Platforms, Amazon, and Alibaba have gained share. Perhaps Alphabet's dominance of the industry it helped pioneer is gradually coming to an end.
Investors can't ignore the compelling bull argument
The rise of ChatGPT has certainly spooked Alphabet shareholders, and the large language model AI's integration with Bing could be a threat to its search business. But it's worth pointing out that since ChatGPT was released in late November, Google's share of the search market has actually increased, while Bing's has fallen considerably, according to Statcounter.
This suggests that panic about ChatGPT could be a bit overblown, particularly given that Google still has a massive lead in the space. Moreover, with top tech talent and a balance of $115 billion in cash, cash equivalents, and marketable securities on its books, one can't question that Alphabet -- already a leader in AI -- has the resources to go toe to toe with anyone.
Alphabet also has some huge tailwinds working in its favor. The digital advertising market is expected to be worth about $1.5 trillion by 2030, and Alphabet has a strong position. Cloud computing is also a major growth engine. The Google Cloud platform posted revenue of $7.5 billion in the first quarter of 2023, up 28% year over year. Additionally, streaming entertainment continues to attract a growing share of people's viewing time. As the owner of YouTube, Alphabet is in a prime position to benefit.
Although Alphabet shares are up 39% year to date, the valuation isn't too demanding. The stock trades at a price-to-earnings ratio of 27, slightly below its five-year average. That's an easy price for investors to pay to gain exposure to one of the best businesses in the world.
As a result, I think the bullish case outweighs the bearish case for this dominant tech enterprise. Investors should consider buying Alphabet stock today and holding it for the long term.
