Market value evaporated by 120 billion dollars! Google's search empire faces a life-and-death challenge from AI

For more than a year, shareholders of Google (GOOGL.US) have been concerned about the long-term threat that artificial intelligence (AI) poses to its "cash cow" search engine business. This week, that threat suddenly became more imminent.

According to Zhitong Finance APP, on Wednesday, an executive from Apple (AAPL.US) testified in court that the iPhone manufacturer is exploring the integration of AI services into its web browser—currently, Google pays about $20 billion annually to maintain its status as the default search engine for Safari. More disturbingly, Apple’s Senior Vice President of Services, Eddy Cue, stated that search volume on Safari saw a historic decline last month.

These signs indicate that query services from competitors like OpenAI and Anthropic may have begun to erode Google's market share in search. This business accounts for half of Google's total revenue and is a major source of its profits. Google subsequently responded on its official blog, stating that the search query volume, including that from Apple users, continues to grow.

This statement partially alleviated market panic, allowing the stock price to rebound from its intraday low on Wednesday, ultimately closing down 7.3%. However, Google's cumulative decline for the week still reached 6%, with a market value loss of $120 billion.

Art Hogan, Chief Market Strategist at B. Riley Wealth Management, stated, "The core issue is whether Google will lose this cash cow? This is the first time Google has faced substantial competition since the birth of search engines, and we are already seeing cracks in its defensive system."

Since the emergence of ChatGPT at the end of 2022, market concerns about Google's lag in the AI field have triggered multiple sell-offs. For instance, in February 2023, doubts about the accuracy of its AI chatbot led to a drop in stock prices.

However, Google has consistently demonstrated strong rebound capabilities, maintaining an upward trend in its stock price prior to this plunge. The first-quarter financial report for the period ending March 31 showed that the search engine advertising business remains robust, driving the stock price up for several days following the report's release.

The scale and speed of this plunge indicate that, under the shadow of disruptive risks from AI, even for a company like Google that possesses top AI talent, investors find it difficult to accurately assess its true value.

For a long time, Google's valuation has remained lower than that of tech giants like Microsoft (MSFT.US). As market concerns about its lag in AI deployment have intensified, this gap has continued to widen over the past year.

According to compiled data, as of Wednesday's close, Google's expected price-to-earnings ratio for the next 12 months is 15 times, lower than the average of 21 times over the past decade; while Microsoft's is as high as 30 times, far exceeding its historical average of 26 times B. Riley's Hogan stated that the increasingly fierce competition in the search engine sector could jeopardize future profits.

He said, "We cannot predict how much market share will be lost or how quickly. This means there is significant uncertainty in the earnings portion of the price-to-earnings ratio."

A representative from Google declined to comment further on this.

Currently, Google's market share remains stable. The latest data from Statista shows that in March, its global search engine market share was approximately 89.7%, down from 92.9% after the release of ChatGPT in January 2023.

Most analysts on Wall Street remain optimistic about Google. Among 76 analysts, over 80% have given a "buy" rating. Although this percentage is lower than that of Microsoft, Amazon (AMZN.US), and Meta (META.US) (all of which received over 90% analyst recommendations), Google's current stock price still has nearly 30% upside potential compared to the average target price set by analysts, indicating a higher potential return than its peers.

Mark Mahaney from Evercore ISI stated that despite the slowdown in Google's search volume growth, revenue growth remains robust. He advised clients to buy on dips in a research report on Thursday.

However, some analysts have turned cautious. Melius analyst Ben Reitzes indicated that the market's expectations for a net profit of $115 billion in 2025 may be overly optimistic.

In a research report on Wednesday, he wrote, "Based on the trends revealed by Cue in April, paid clicks may deteriorate further. In our experience, such changes often come quickly and sharply."