Google Will Survive AI and Break-up Calls: Why Alphabet Stock Could Gain 50%

Google is under attack, but Alphabet stock is poised to emerge victorious.

This past week, the U.S. government delivered a powerful blow to Google by proposing remedies aimed at dismantling its dominance in the search arena. These proposals include the sale of its Chrome browser and stricter monitoring of data, leading to a sharp 4.7% drop in Alphabet’s stock price to $167.63 on Thursday. This uptick in regulatory scrutiny comes at a time when investors are already anxious about the rise of generative artificial intelligence (AI) platforms like ChatGPT, Perplexity, and Microsoft, all of which threaten to siphon users from Google as the need for traditional search decreases.

Alphabet shareholders have every reason for concern; without the advertising revenue generated by its search business, the tech giant’s foundation could crumble. However, those sentiments could be overly pessimistic. Since its IPO in 2004 at a split-adjusted $2.13 per share, Google has adeptly navigated various challenges, including the seismic shift from desktop to mobile technology. The evolving landscape ahead may be complex, but generative AI opens doors to new revenue opportunities, particularly as Google’s own AI initiative, Gemini, continues to develop.

A Silver Lining for Alphabet

Despite the government’s antitrust challenges, investors should note that these risks appear to be reflected in the stock’s current valuation. Alphabet is currently the most undervalued among the so-called “Magnificent Seven” tech stocks and trades at a lower price-to-earnings ratio than the S&P 500 index. The search business itself remains robust, strong, and cash-generating, a capacity unlikely to diminish as user behavior shifts over time.

Jason Browne, president of Texas-based investment advisory firm Alexis Investment Partners, remarks, “I don’t see betting against Google.” This sentiment is well-founded, as the company has consistently proven it can adapt and grow. Alphabet’s advertising enterprise rakes in over $250 billion annually, while its Android operating system has become the predominant mobile platform, surpassing Apple’s iPhone user base.

Alphabet is also making significant strides in the cloud sector, which is projected to generate $58 billion in revenue by next year. Additionally, YouTube, frequently eclipsed by TikTok in media narratives, has emerged as the top content delivery platform, garnering over a billion hours of daily viewership. The cash flow from these various segments, totaling $435 billion over the past decade, allows Alphabet to explore its ambitious “other bets” like Waymo’s autonomous driving technology and Google Fiber broadband, which are not immediately profitable but hold potential for future success.

The AI Threat and Market Dynamics

However, the rapid ascendance of generative AI does introduce risks to Alphabet’s long-standing dominance. Following the launch of ChatGPT in November 2022, the landscape shifted rapidly, enabling users to receive direct answers to queries instead of laboriously sifting through lists of links. ChatGPT was an immediate sensation, reaching 100 million active users within a mere two months of its debut. Following closely, Perplexity has gained traction by providing an “answer machine” that bypasses traditional search mechanisms.

According to Futurum Group CEO Daniel Newman, Microsoft initially claimed that gaining just 1% of search market share could equate to $2 billion in incremental revenue. Yet, the reality is that Microsoft has not managed to capture any market share. Meanwhile, Alphabet’s latest earnings report showcased an area of resilience, as search revenues exceeded expectations, coupled with a 35% growth in cloud revenue.

Analysts like Melius’ Ben Reitzes stress that despite the competitive landscape, Google’s search functions are not only still growing but also adapting with AI-generated summaries that enhance the user experience while preserving ad monetization channels.

Future Potential and Recovery

With many upstart competitors still in their formative stages, Alphabet’s established revenue-generating mechanisms put it in a favorable position. GroupM forecasts a 6% growth in search advertising by 2025, driven by an increase in AI-assisted search capabilities. It looks highly probable that users will begin to favor refined AI-driven search outputs over traditional hyperlinks, continuing to drive higher search volumes.

Analysts remain bullish—Wedbush’s Dan Ives recommends IR quality Buy ratings with a price target of around $210. Similarly, Melius analysts project that generative AI features can sustain alphabet’s growth at around 10% annually through 2027.

Antitrust Concerns: Disruptive Yet Manageable

While the concerns surrounding antitrust allegations are legitimate—as indicated by recent legal actions against the company—there remain clear signs that the stock is reacting to these overhangs. Alphabet trades for 19.4 times earnings, an attractive valuation compared to the S&P 500’s 22 times. Despite regulatory risks, Alphabet’s cloud segment alone feasibly underpins a valuation taller than $300 billion, while YouTube could be valued at around $800 billion based on industry averages.

Current estimates suggest a potential stock price surge to $260, representing roughly a 55% increase from its last closing price. Therein lies the essence of Alphabet’s resilience. The advent of AI presents new opportunities rather than threats, indicating that Alphabet’s best days may still lie ahead. Google isn’t just surviving; it’s poised to thrive in an evolving landscape, cementing its position as a technology titan for years to come.