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The technology sector is disruptive and driven by innovation. This means that a market leader today may become irrelevant tomorrow. In the last few decades, we have seen the downfall of several tech leaders, including BlackBerry (BB), Nokia (NOK), and Eastman Kodak (KODK).
While the generative artificial intelligence (AI) space is still in its infancy, it is forecast to grow rapidly through 2030 and beyond, attracting billions of dollars in investments. And once AI is adopted at scale, companies across sectors may lose their competitive moat. According to a MarketWatch report, Google’s (GOOGL) (GOOG) Search business is threatened by AI, making the tech giant vulnerable to this megatrend.
Is Google the Next Kodak?
Shares of Alphabet, Google’s parent company, are down 24% from their all-time highs, valuing the Big Tech behemoth at a market cap of $1.91 trillion. Today, analysts are worried that AI platforms such as ChatGPT, Claude, and Perplexity might threaten Google’s search dominance. In a report published by MarketWatch, Melius Research analyst Ben Reitzes has drawn a stark comparison, asking if Google could be the next Kodak.
“Google is losing the next generation of ‘searchers’ to ChatGPT,” Reitzes wrote in a note to clients. He points out that while Alphabet generates substantial free cash flow ($77 billion expected this year), it faces a strategic dilemma. Unlike Microsoft (MSFT), which can reduce capital expenditures to boost free cash flow, Reitzes believes “Alphabet can’t afford to give that gift to shareholders,” given the competitive pressure.
The analyst highlights a critical branding issue: “Google” is a verb, but its AI offering “Gemini” isn’t. Instead, younger users say they “ChatGPT’d” their papers. Reitzes questions if Google can match OpenAI’s potential $12.7 billion in subscription revenue this year.
Is GOOGL Stock a Good Buy Right Now?
In the fourth quarter of 2024, Alphabet reported revenue of $96.5 billion, an increase of 12% yearly, driven by strong search and cloud computing performance. Its earnings per share of $2.15 exceeded consensus estimates of $2.13 in the December quarter.
Search revenue grew 13% to $54 billion, with strength in financial services and retail verticals. YouTube advertising revenue increased 14% to $10.47 billion, bolstered by U.S. election advertising, which nearly doubled compared to 2020. Google Cloud maintained impressive momentum, as it grew by 30% to $12 billion. Alphabet’s operating income rose by 31% to $31 billion, indicating a margin of 32%, up 4.6 percentage points compared to the last year.
Google unveiled Gemini 2.0 in Q4, with plans to integrate additional AI features into Search in 2025. Alphabet explained that AI overviews in Search continue to drive satisfaction and usage, with monetization rates comparable to traditional Search.
Alphabet plans to spend $75 billion in capital expenditures this year to support its AI initiatives. Management stated that cloud customers are consuming 8x more compute capacity for AI training and inference compared to 18 months ago. These trends underscore the growing demand for AI infrastructure and services that's driving Alphabet's aggressive investment strategy.
Is Google Stock Undervalued?
Analysts expect Alphabet to increase its sales from $350 billion in 2024 to $587 billion in 2029. Comparatively, earnings are forecast to expand from $8.04 per share to $16 per share in this period. If the tech stock is priced at 20x trailing earnings, GOOGL should trade around $320 per share in early 2030, indicating upside potential of 100% from current levels.
Out of the 52 analysts covering GOOGL stock, 40 recommend “Strong Buy,” three recommend “Moderate Buy,” and nine recommend “Hold.” The average target price for the tech stock is $217.24, 38% above the current trading price.
