Like many of the Magnificent 7, Alphabet (NASDAQ: GOOG) stock has performed poorly over the last few months. Its once all-powerful moat in internet search is coming under serious threat from multiple angles. So, is this merely a mid-life crisis or something much more problematic?
Strong growth
In its Q1 results, posted at the end of April, the business continued to see strong growth momentum. Revenues for the quarter came in at $90bn, 12% higher than a year ago. Representing over 50% of total revenues, Google search was up 10%. Google subscriptions, platforms, and YouTube ads also saw strong growth momentum.
The business continues to invest heavily in AI. It recently launched Gemini 2.5, although it’s still in preview mode and doesn’t offer a paid tier with full access yet.
The new AI model is not aimed at your average consumer. This probably explains why the pricing model will be different. It claims the model is capable of “analyzing large datasets, codebases, and documents using long context”. But like so many of its peers, it has been rather vague on detail, other than saying it had addressed user feedback.
Mid-life crisis
Google, like all the other Magnificent 7 stocks, are trying to understand how generative AI is likely to evolve and whether it’s a long-term threat to their business models. With 90% of all internet searches being conducted through Chrome, Google looks particularly vulnerable to me.
A month ago, investors were totally spooked after an Apple executive disclosed in a court case that Google-search traffic on its devices using Safari fell for the first time ever.
The speed of adoption of generative AI among the general consumer is what has completely taken me by surprise. Key to an acceleration in this trend have been AI-generated summaries at the top of search results.
Google and Microsoft may be at the forefront of rolling out this new feature, but this technology has the potential to cannibalise existing revenue streams.
Zero-click search
Search engine optimisation (SEO) is the foundation of the internet. The whole marketing industry is based on fine tuning algorithms to ensure a company attracts traffic to their web pages. The rise of so-called “zero-click” results looks set to upend this key tenet.
In a recent survey conducted by consultancy firm Bain, it found that about 80% of consumers now rely on zero-click results in at least 40% of their searches. They estimated that this new phenomenon has reduced organic web traffic by between 15% to 25%.
The likes of Perplexity AI and ChatGPT continue to attract consumers. According to Bain’s research, approximately 40% to 70% of LLM users use the platforms to conduct research and summarise information, find the latest news and weather, and ask for shopping recommendations.
Across the marketing industry, generative engine optimisation or GEO is becoming the new buzz term. This is in recognition of the growing role of bots trawling the web to train LLMs.
Marketing revenues from clicks are the lifeblood of Google’s business model. As it tries to find way to integrate and grow revenues from its own AI offerings, capital expenditures will continue to grow. With so much future uncertainty, I will continue to observe from the sidelines, but I don’t rule out an investment in the future.
