Google's Search Dominance Challenged: AI Startups and Antitrust Concerns Shake the Tech Giant

Google's Battle To Maintain Supremacy (NASDAQ:GOOG)

Our previous analysis two months ago for Alphabet Inc. (NASDAQ:GOOG) (NASDAQ:GOOGL) included a bearish divergence warning, with an RSI fast approaching 70, signaling it was overbought. GOOG has dropped 7% since then, against our cautious view, despite the positive outlook for the long term. However, the overall bullish thesis remains intact. The recent decline has brought the RSI down to 45, signaling that GOOG is approaching oversold territory, though not fully there yet. Ideally, a clearer oversold signal would occur around an RSI 30, which could present a more compelling buying opportunity. As it stands, GOOG is getting closer to a potential new bull run, making it a stock to watch closely in the near term. Investors should consider this dip a potential entry point, especially if the RSI continues to decline towards more oversold levels, which would align with a more robust bullish setup. GOOG's price of $165 sits below the average price target for 2024 of $175, which aligns with the Fibonacci retracement level of 0.618, suggesting potential resistance. The optimistic target of $210 corresponds with the Fibonacci level of 1, indicating strong bullish momentum if this level is approached. Conversely, the pessimistic target of $142 aligns with the Fibonacci level of 0, indicating strong support if the price declines. The Relative Strength Index (RSI) is at 45, showing no bullish or bearish divergence, with a downward trend indicating waning momentum. A long setup is identified at an RSI of 30, suggesting a potential buy signal if the RSI continues to decline. The Volume Price Trend (VPT) line is also trending downward, with the current VPT at 239.69 million and the moving average at 230 million. The VPT is approaching a bottom touchdown on its moving average, hinting at a possible reversal. Based on the last ten years of monthly seasonality, August 2024 has a 45% chance of a positive return, indicating moderate seasonal strength. Overall, the technical indicators suggest caution with potential buy opportunities if key support levels are reached. Alphabet's strategic investments in AI are crucial to stimulating future growth. The company has injected AI technologies into all its services, which help raise more revenue and increase user engagement. The AI enhancements on Google Search have also tried to boost user activity, especially among the young generation. Adding AI solutions to the part of Google Cloud has been the center of the segment's growth. Cloud revenues jumped 29% during the second quarter to over $10 billion, and the cloud is fast emerging as the other big revenue generator for the behemoth. Over 2 million developers already use Google's Gemini, including Alphabet's robust AI strategy comprising infrastructure and apps. Google Search has long been the backbone of Alphabet, maintaining a stable market share even amid growing competition. However, the company's stronghold on search has been continuously disputed for the last year due to improvements made in the frontier of generative AI, especially from Microsoft Corporation's (MSFT) Bing. Even with all the fierce efforts Microsoft is making to replace Bing as a credible alternative, Google's market share does not seem to have taken a serious hit. Sundar Pichai's approach of sticking to Google's core strengths rather than retrofitting a response to competitors indicates that the company is assured of its products. According to Deepwater Asset Management, Google Search remains strong due to its habitual nature. Almost 8.55 billion searches are hosted daily. This habit-based usage is further entrenched with continued AI enhancements underpinning Google's position against potential disruption. The unfolding of the prototype for OpenAI's SearchGPT may now threaten Google's monopoly on search. Financed by Microsoft and currently collaborating with Apple Inc. (AAPL), OpenAI possesses an avant-garde new search product that continues to stumble and find its way to acceptance in the market. This product is still in the testing phase, and its legitimacy in the market remains unproven, as noted by concerned Alphabet investors. Credibility, resources, and capability are all on the side of OpenAI. Still, developments that Alphabet is now making in AI-with its leading edge regarding victories in AI competitions-cemented its commitment to stay in AI. Having more than $100 billion of cash reserves, Alphabet has what it takes to keep investing in AI and ward off competitive threats. Therefore, to maintain its competitive advantage over SearchGPT, Google can leverage its massive user base and extensive data, enhancing search results' accuracy and relevance. Its deep AI and machine learning expertise, exemplified by advanced models like BERT and MUM, allows Google to deliver superior, personalized search experiences. Finally, integrating Google's services, such as YouTube and Google Maps, creates a seamless ecosystem that keeps users engaged and loyal. Continuous innovation in AI-driven features like Google Lens and voice search will enable Google to stay ahead of competitors, ensuring it remains the dominant search market. Alphabet recorded solid financial performance in Q2; nevertheless, the market wasn't pleased as the CapEx was perceived as higher than expected. While Alphabet's strategic investments in AI certainly have a lot of promise, they also carry a lot of inherent risks-the market reacts out of fear over near-term margin pressure from the higher CapEx spending, with management looking forward to the optimism of AI monetization opportunities but investors looking for immediate returns. Management's commitment to not underinvest in the critical areas-despite potential short-term concerns about profitability-signals a long-term strategic vision. Alphabet is confident of the eventual AI monetization opportunities that can be opened by this means, coupled with developing further operational efficiencies. Doubts over Alphabet's margin sustainability intensified after it announced plans to at least maintain, if not step up, quarterly CapEx for the remainder of the year. Management's cautious tone regarding probable margin pressures in Q3 adds to these concerns. However, the risks can be mitigated due to Alphabet's proven record of reengineering its cost base and enhancing operating efficiencies. The operating margins have shown a positive trajectory, and one of Alphabet's operating improvements attests to the success of its cost-cutting and efficiency drives. As a result, Google reported an operating margin of 32% in Q2 2024, compared to 29% in 2023. Hence, this improvement indicates Alphabet's robust financial health and investment capacity for future growth. Alphabet is one of the strongest technology firms, perhaps primarily due to heavy investments in AI and cloud services. While some remain concerned about high CapEx levels and near-term pressure on operating margins, Alphabet has long positioned itself for long-term growth through innovation and investment in its infrastructure. For this reason, investors seeking sustained revenue growth should monitor developments in Google Cloud and AI integration closely. Nevertheless, Alphabet remains a solid investment due to its sound financials and leadership in important technology sectors-even as the market is likely to remain volatile.

Can Perplexity AI wrest power from search engine goliath Google?

Perplexity AI, an artificial intelligence search start-up, hopes to chip away at Google's (NASDAQ:GOOG)(NASDAQ:GOOGL) dominance in the search arena, but do they really stand a chance in this race? There has been a recent rise of AI-powered search options over the past few months. Google's AI Overview, OpenAI's SearchGPT and Microsoft's (NASDAQ:MSFT) Bing all utilize generative AI to answer queries. Perplexity has started shifting its business model from a subscription basis to advertising, which is more in line with how Google Search generates revenue. It is also receiving ample funding from big-time investors. Late last month, Bloomberg reported Perplexity increased its valuation from $1B to $3B due to its latest round of fundraising. Early big names investors include Nvidia (NVDA) and Amazon (AMZN) founder Jeff Bezos, among others. Perplexity's search engine utilization is also on the rise. It answered approximately 250M questions in July, compared to 500M throughout the entirety of 2023, according to an in-depth article by the Financial Times. "At the end of the day, the smaller player in the space has two advantages: velocity and focus," said Perplexity Chief Business Officer Dmitry Shevelenko, in an interview with the Financial Times. "Our users and team only think about one thing when it comes to Perplexity: a place you get your questions answered. Competition sharpens our focus even more." Analysts have varying opinions when it comes to Perplexity's chances of posing a risk to Google Search. "I think Perplexity is a significant risk to Google Search over the long term," said Seeking Alpha analyst Oliver Rodzianko. "From what I've observed, Google's Gemini has less utility compared to ChatGPT." Perplexity does not build its own AI model, unlike Google, which utilizes its own model, Gemini. Rather, Perplexity uses a combination of existing AI systems, such as OpenAI's ChatGPT, and builds upon them. Perplexity used to rely on a licensed version of Microsoft's (MSFT) Bing for its search index, but has since built its own. "Perplexity enhances the quality of output by building on what ChatGPT and other major LLMs do well," Rodzianko said. "Perplexity is also focused on academic sourcing, which poses a threat to Google Scholar." "I'm bullish on Alphabet, but I think it has to sharpen its commercial and professional utility with Gemini to stay competitive," he added. "At this stage, Google is still well-positioned, and Search remains robust, partly because I think the use case for LLMs is distinct from traditional search functions at the moment, although this is subject to change." Google still held 91% of global market share in search across all platforms as of July 2024, according to data by StatCounter. It was 92% one year prior. The slight decline was driven by desktop users, where it has dropped from 83% to 80% of market share over the past year. On mobile devices, its market share of 95% remains virtually unchanged over the past 12 months. "I don't see a future where Google is going to be replaced by any search engine or an AI search start-up like Perplexity anytime soon," said Seeking Alpha analyst Bohdan Kucheriavyi. "Despite the initial fears, OpenAI's chatbot ChatGPT did not undermine Google's search business, which according to the latest earnings report is thriving, and the integration of ChatGPT into Bing also did not help Microsoft capture a significant portion of Google's market share. With the introduction of AI Overviews, it's hard to see Google losing its dominance over the search market." "While start-ups like Perplexity will likely continue to raise more funds and grow their top-line thanks to several tailwinds such as the improving macro environment, higher ad spending, and the increasing interest for anything that has to do with AI, they are still far away from posing any threat to Google," he added. More on Alphabet, Microsoft, etc. Microsoft Is One Of The Few Undervalued Tech Investments Microsoft Investors Should Focus On The Big Picture, And Ignore The Pimple On An Elephant Microsoft: Azure Should Make A Comeback Thanks To AI Wells Fargo says investors need to be selective, spotlights META, GOOG, and NFLX Palantir-Microsoft deal is 'launching pad' for AIP, Wedbush says

Is This New OpenAI Product a Potential Google Killer? | The Motley Fool

Alphabet could have the most to lose as a result of artificial intelligence and the growing popularity of chatbots. Alphabet (GOOG 0.95%) (GOOGL 1.01%) built its massive business around providing users with useful search results. Its search engine is so critical for businesses to succeed that companies often hire experts on search engine optimization to ensure they rank high on search results. Being in the top position can make a significant difference in how much traffic and revenue a business generates. Chatbots and artificial intelligence (AI) can throw a serious wrench into that. If, for instance, users only need to ask a personal assistant or chatbot a question, rather than use Google Search, it can impact how much traffic is going to the popular search engine. Tech companies have been investing in developing their own chatbots, with arguably none more popular than OpenAI's ChatGPT. And OpenAI recently announced plans to launch another product, and this one is a more direct threat to Google Search. It's an actual search engine called SearchGPT. In July, OpenAI announced that it's testing SearchGPT, which uses AI to help people find what they're looking for, similar to its chatbot ChatGPT. The key difference is that, unlike the chatbot, where users get a single result, they can get multiple results and links to sources. The company says that SearchGPT will "combine the strength of our AI models with information from the web to give you fast and timely answers with clear and relevant sources." It's currently in testing mode and there's a wait list for people to try the prototype, so there's no timeline as to when it may be fully available to the public. Google faced competition from many search engines in the past, but there's definitely something different about SearchGPT. ChatGPT has proven to be immensely popular, already having more than 200 million monthly users. And that popularity could help SearchGPT be a potentially formidable competitor to Google Search. Compounding the issue for Google is a recent ruling in the courts that found that Alphabet has an illegal monopoly when it comes to its search engine. Alphabet has been paying companies billions of dollars to become the default search engine on phones and browsers. The court ruled that by doing so, the company effectively stifled competition. It's not clear what the penalties or consequences will be, but the ruling could significantly impact Google Search's practices. This could exacerbate the challenge the company may face from SearchGPT in the near future. It's hard to overstate the importance of these developments. Of the nearly $85 billion in revenue that Alphabet generated in its most recent quarter, which ended in June, approximately $49 billion was from revenue related to its "Google Search & Other" segment. When including Google Network and YouTube ads, all Google advertising revenue for the period totaled $64.6 billion. Alphabet has a lot at stake if it loses its dominant position in search. It generates a considerable amount of money from ads related to Google Search. If the recent ruling changes how its business operates, it may be easier for a competitor, such as SearchGPT, to put a big dent into the web traffic that goes to Google Search and, ultimately, the revenue Alphabet generates from that. Investors shouldn't dismiss the threat that SearchGPT and AI, in general, pose to Alphabet's business. The company could potentially have the most to lose due to AI since it's so dependent on search queries and questions people enter into its search engine. Alphabet has been working on developing its own chatbot Gemini, and its success could ultimately determine how effectively Alphabet can fend off this latest threat. But it's too early to tell at this point what the impact will be from SearchGPT. The danger for Alphabet is that with so much exposure to search-related revenue, a drop in that could significantly impact its valuation, which is currently around $2 trillion. Before I'd consider investing in Alphabet's business, I'd wait to see not only how effective and popular SearchGPT is, but also what impact the recent antitrust ruling has on Google Search. Until there's clarity on those two issues, the prudent thing for investors to do may be to wait on the sidelines for now. Investing in the tech stock with those two issues still up in the air could leave investors exposed to too much risk and uncertainty.

Buy Microsoft To Hedge Against Google Antitrust Defeat (NASDAQ:MSFT)

As the arguably safest and most reliable Mag 7 stock, Microsoft, at 13% off its high, is a great buy regardless of hedge potential. Last Monday, US District Judge Amit Mehta ruled against Google (GOOG) (GOOGL) in a long-running antitrust suit brought by the Justice Department, stating: "After having carefully considered and weighed the witness testimony and evidence, the court reaches the following conclusion: Google is a monopolist, and it has acted as one to maintain its monopoly." Judge Mehta found Google to have a monopoly in text search ads (which is not illegal) and abused its monopolistic position through revenue share agreements with major browser providers like Apple (AAPL) and Mozilla to lock in its search engine as the default on their browsers (which is illegal by the Sherman Act of 1890). With the first phase of the suit now completed, the next round begins in September: Bloomberg Law reports that Mehta "ordered the parties to submit a joint proposed schedule by Sept. 4 to address remedies for the antitrust violations he found." Google stock fell immediately following the ruling, only to rebound over the next few days, so it seems the market is still weighing what it means for the company's future. Mike Masnick of Techdirt argues that Judge Mehta is stuck between a rock and a hard place when it comes to potential remedies: Google may be a monopoly, but it still offers the best web search product for consumers. With Google's search business becoming a giant question mark, the only surefire winner of the ruling appears to be Microsoft (NASDAQ:MSFT), whose Bing search engine is currently the only viable competitor to Google as the government seeks to open the field to more competition. Microsoft CFO Amy Hood once said that every percentage point of market share Bing can wrest from Google translates into $2B in additional revenue (Bing currently has ~3% global search engine market share, vs. 91% for Google). Microsoft CEO Satya Nadella was a key witness for the Justice Department in the antitrust case, testifying that the anticompetitive forces favoring Google were so insurmountable that even a giant like Microsoft cannot compete. Investors worried about antitrust remedies against Google can do worse than hedging with a position in Microsoft. Let's take a look at some potential cures to understand why: 1) No search engine is allowed to pay for the default slot on browsers. Browsers offer users a choice screen upon installation. This would actually be the best possible outcome for Google, since most users would pick Google anyway, and now it would save ~$30B in traffic acquisition payments to browser providers. The argument against this solution would be that the EU already did this back in 2018 (implemented 2021) and Google's market share remained virtually unchanged. However, the goal here is not to alter consumer behavior, but to allow potential competitors the opportunity to succeed: since every party in the case ultimately agreed that Google is the best search engine available today, Google can reasonably be expected to retain its market share even after any remedies are enforced. This outcome is still beneficial from a regulatory perspective because it means future rivals only need to beat Google in search quality to convince users to switch over, they don't also need to beat Google's ad targeting profitability (it may even open the field for privacy-focused search engines like DuckDuckGo to flourish). Google profits instantly go up +30%, Mozilla could potentially go bankrupt. No hedge necessary. 2) Google is not allowed to bid for the default slot on browsers, but everyone else is. At first brush, this seems like an unfair and improbable ruling, especially since the likely winning bidder will be Microsoft, a company even larger than Google. However, Judge Mehta noted that "the same conduct can be exclusionary when done by a dominant player, even if it's not when it's done by a smaller one," and Microsoft is absolutely the smaller player in search. Would it make a difference? During the trial, Apple senior VP Eddy Cue testified that "there's no price Microsoft could ever offer" that would convince Apple to preload Bing on Safari instead of Google. However, it's important to note that the "price" search players are offering Apple is not a flat fee, but a revenue share percentage (Google is currently paying Apple 36% of Safari search revenue). That means even 100% revenue share from Bing would be a bad deal for Apple: most of their users would probably change back to Google anyway, and 36% of a large pie is better than 100% of a small one. The calculus changes if Google's offer is $0: now, 100% revenue share from Bing suddenly seems much more attractive. Would it be enough to get Apple to switch? Not necessarily, since Apple prioritizes preserving its premium brand image as much as profits (admittedly, a $20-30B bottom-line hit would be painful even to Apple). Even if Apple isn't swayed to switch to Bing, companies like Samsung (OTCPK:SSNLF) may, and companies like Mozilla will most likely be forced to as a matter of survival. Microsoft wins. 3) Google is forced to open up its search data to competitors. This would potentially be the most interesting remedy, since a large part of why Google became so dominant is because it not only came out of the gate with the superior product, but then also benefitted from having lots of users searching on its platform, observing their behaviors, improving its search algorithms based on this user data, bringing in even more users. This virtuous cycle of "query flow" is such a massive advantage that Satya Nadella cited it as the reason why Microsoft was willing to strip its own branding off Bing and give the whole product to Apple basically for free, losing $15B a year in the process: Nadella believed the search data they get in return would allow Microsoft engineers to rapidly catch up to Google. Opening up access to Google's proprietary search data would level the playing field and neutralize one of Google's most important economic moats. Google's superior search algorithms would still put it ahead of the pack by several years at least, but now competitors like Bing would have the tools they need to close the gap: whether they actually can would remain to be seen. Winner: Microsoft, as well as smaller search players like DuckDuckGo, Brave Search, and OpenAI's new SearchGPT. 4) Google is forced to spin off Chrome and/or Android. Expert consensus is that this would be the most severe antitrust remedy, and unlikely. The tricky thing about Google's internet empire is that search ads pay for everything else: Chrome and Android currently make no money and would likely not survive as independent businesses, in my view. Android could conceivably adapt its business model by charging a licensing fee, but I believe Chrome would be toast. If default slot payments are abolished, the only browsers that will survive are those subsidized by large, profitable parent companies, leaving Apple Safari and Microsoft Edge. An uncoupling between Android and Google might also encourage Microsoft to invest bigger into mobile, possibly coming up with a new smartphone line running Android OS and preloaded with Microsoft apps like Office, Outlook, Teams, OneDrive, and Edge (kind of like the now-retired Surface Duo line). Winner: Microsoft. Examining all the scenarios above, Google wins in 1 of them, and in the other 3, Google's losses are Microsoft's gains. That means for Google investors, Microsoft is the perfect hedge for a potential antitrust defeat, in my opinion. Of course, the way the real story may play out is not so neat and simple. There will be appeals, possibly years of them. The ruling may get overturned. Apple may decide to create a search engine of its own to make up for the lost revenue from Google (The Information reported back in 2022 that Apple was at least 4 years away from being ready to launch its own search engine). Microsoft's step forward and Google's step back may be negative sum for both companies as margins get squeezed by price wars (Google's Services division is currently enjoying 35% operating margins), resulting in lower prices for advertisers and consumers: mission accomplished by the Department of Justice. Microsoft is a great buy anyway, even without hedge considerations, as it has fallen 13% off its high of $468 this year. A big chunk of that dip came as the result of a Q4 earnings report that disappointed investors: cloud growth slightly missed estimates, AI capital investments dragged margins a bit, and there's still a negative sentiment overhang from the CrowdStrike (CRWD) debacle. But MSFT is still the most reliable workhorse in the Mag 7, with a higher credit rating than the US Government, double-digit year-over-year growth in both revenue and income, a highly diversified business that spans across intelligent cloud, productivity software, personal computing, and gaming, and a reasonable middle-of-the-pack earnings multiple relative to its Mag 7 cohort. Although the generative AI fervor has been waning recently, Microsoft's dominance in enterprise means it is still the company that has the best path towards eventual monetization of that technology, making it the perfect portfolio partner to Google (a company that is both potentially enriched and threatened by AI) in a different way.