Alphabet (GOOG 0.61%) (GOOGL 0.48%) is often considered a reliable blue chip tech stock. It owns Google, the world's most widely used search engine; Android, the largest mobile operating system; Chrome, which dominates the web browser market; and YouTube, the top streaming video platform with over 2.7 billion monthly active users. It also provides a broad range of market-leading cloud-based productivity and infrastructure services.
Over the past decade, Alphabet's stock rallied nearly 480% as its digital advertising and cloud businesses expanded. From 2014 to 2024, its revenue grew at a compound annual growth rate (CAGR) of 18% as its EPS increased at a CAGR of 23%.
Image source: Google.
But today, Alphabet's core advertising business, which generated 76% of its revenue in 2024, faces three existential challenges. First, generative artificial (AI) platforms like OpenAI's ChatGPT are changing how people search for information. Second, short video platforms like ByteDance's TikTok and Meta Platforms' Reels are pulling advertisers and viewers away from YouTube's longer-format videos. Lastly, U.S. antitrust regulators are pressing Alphabet to sell Chrome or Android.
Some investors might be wondering if Alphabet is doomed to become the next IBM, which lost the PC and enterprise software markets to its nimbler competitors over the past four decades. But is that a fair comparison, or is it just a bearish hyperbole which overlooks the actual differences between Alphabet and IBM?
IBM's biggest mistakes
IBM dominated the personal computing market in the 1980s and early 1990s, but it didn't actually own the IP to any of the off-the-shelf components in its PCs. As a result, other PC makers produced cheaper "IBM PC clones" with the same hardware. IBM tried to differentiate itself from those clones with its own operating system, OS/2, but that effort flopped as Microsoft Windows became the dominant OS for IBM PC clones.
NYSE: IBM
Key Data Points
Those failures forced IBM to back away from the PC market, and it eventually sold its ThinkPad PC business to Lenovo in 2005. It also sold its server business to Lenovo in 2014. That retreat shows how a company's core growth engine can wither if its moat dries up and it fails to keep up with its nimbler competitors.
By the late 2000s and early 2010s, IBM was struggling to expand its aging enterprise software and IT services divisions against cloud-based competitors like Microsoft and Amazon, and Google. But instead of aggressively investing in new cloud services and transforming its on-premise software and services into cloud-based ones, IBM focused on divesting its weaker units, cutting costs, and buying back more shares to boost its EPS.
By the time IBM tried to expand its cloud business by acquiring SoftLayer in 2013, it had already far fallen behind Microsoft, Amazon, and Google. Its fortunes didn't improve until 2020, when its cloud chief Arvind Krishna took the helm as its new CEO, divested its struggling infrastructure services business, and leveraged its acquisition of RedHat (in 2019) to expand its higher-growth hybrid cloud and AI businesses.
Is Alphabet headed down the same road?
The bears expect Alphabet to face the same fate as IBM as generative AI platforms intercept more search queries and reduce the effectiveness of its search engine and targeted ads. Google is trying to catch up with its own generative AI platform, Gemini, but it could still end up as the OS/2 of the AI market if it falls behind ChatGPT and Microsoft's Copilot.
Moreover, Android is still an open-source OS which can be modified by anyone. That makes it easy for companies like Amazon to launch their own forked versions of Android (Fire OS) and build their own app-driven ecosystems. Google's cloud platform business is still growing, but it ranks a distant third in the cloud race behind Amazon Web Services (AWS) and Microsoft Azure.
NASDAQ: GOOGL
Key Data Points
Meanwhile, YouTube -- which drives a lot of its advertising growth -- doesn't have a meaningful moat against TikTok or Reels. Its top creators can easily cross-post their content to those rival platforms, and they'll likely shuffle toward the one which gives them the biggest cut of their ad revenues. YouTube is trying to offset that pressure by expanding its subscriptions business, but that strategic shift strongly suggests the growth of its advertising business will cool off over the next few years.
The U.S. Department of Justice (DOJ) could further erode Google's defenses by forcing it to sell Chrome, which gathers data from its users for its core advertising business; and Android, which locks 2.5 billion users into its Google-powered apps.
Like the old IBM, Alphabet is trying to offset that pressure by pruning its workforce, cutting costs, and buying back 11% of its shares over the past five years. However, its future could remain murky if it fails to keep pace with the shift toward AI services.
Alphabet isn't becoming the old IBM (yet)
It's tempting to dismiss Alphabet as the next IBM, but it's still growing a lot faster than Big Blue. Its expansion efforts have been undeniably clumsy, but they could still bear fruit over the next few years. I'd keep a close eye on its recent challenges, but I wouldn't rule out a surprising comeback once it finally gets its act together.
