Shares of Alphabet (GOOGL) rose 8% since the start of the year, underperforming its Big Tech peers and the broader market, with the S&P 500 index gaining over 10% during the same period.
In a Sunday note to clients, Jefferies analysts highlighted 3 key factors that are weighing on GOOGL’s performance so far this year, including the long-term threat from AI technology to Alphabet’s (NASDAQ:GOOGL) core search business, concerns over management’s leadership, and the lagging cloud business.
Regarding the first factor, analysts said that ChatGPT created the fear that in the long run, Alphabet’s ad revenues “could be pressured if users shift their behavior from search engines to chatbots when looking for information.”
In addition, the company’s margins could also feel the heat, particularly if its traffic transitions from traditional search “ to its own gen AI tools (SGE), which carry higher training & inferencing costs,” analysts explained.
Jefferies also pointed out concerns among investors about CEO Sundar Pichai's response to the AI competition and the prolonged search for a successor to CFO Ruth Porat, with no updates eight months in.
Moreover, Google Cloud's growth continues to trail behind Amazon's AWS, analysts noted, with its revenue increase significantly lower and its market share remaining third after AWS and Microsoft's Azure.
Despite these concerns, analysts believe GOOG has “much potential” for a full recovery.
“In '23, GOOGL had a rough start due to macro and AI, but rebounded to end +58% as both factors improved. While '24 may not hit same %, we believe stock can grind higher as it responds to the 3 concerns,” analysts wrote.
The tech giant still boasts a “top AI talent” and intellectual property, significant data from its dominance in the search market and YouTube, and a “scaled and sticky user base, with at least 9 products with >1Bn users,” they said.