The I/O conference is expected to reshape Google's AI narrative! The market bets that Alphabet will soon reverse its stock price decline

According to the Zhitong Finance APP, institutional and individual investors who are long-term bullish on Google's parent company Alphabet Inc. (GOOGL.US) are turning their attention to this week's Google Developer Conference. They hope that this tech giant, which has underperformed the S&P 500 index this year, can reshape its AI growth narrative amid concerns over its precarious dominance in the search engine market and intensifying competition with generative AI rivals like OpenAI.

The core logic for investors, including hedge fund legend Bill Ackman, to hold Alphabet shares long-term is to enhance Gemini's market share in the generative AI application field, drive more B-end customers to develop AI applications using Google Cloud Platform, and defend its dominant position in the search engine sector. Among the seven major tech giants that have led the U.S. stock market in recent years (Apple, Nvidia, Alphabet, Microsoft, Amazon, Meta, and Tesla), Ackman has long favored Alphabet. The 13F report of Pershing Square Capital Management, founded and led by Ackman, shows that he continues to increase his position in Alphabet.

The Google I/O Developer Conference, starting on Tuesday Eastern Time, is expected to showcase the company's latest advancements in artificial intelligence technology. Although Alphabet continues to invest heavily in all AI-related areas under Google, the increasingly proactive technical roadmap and product updates at this developer conference are expected to alleviate investors' concerns about the encroachment of generative AI competitors and strong rivals like Perplexity AI focusing on "AI search" on its search engine dominance.

"The market hopes this conference will outline a strong future roadmap, as everyone is waiting for the AI-related shoe to drop, ready to pull the trigger at any negative news," said David Katz, Chief Investment Officer of Matrix Asset Advisors.

"I believe the fundamentals of this tech giant are far stronger than the pessimistic sentiment reflected in the current stock price, so we view the extreme negative sentiment as a buying opportunity. However, compared to traditional search models, AI indeed brings more resistance, but Google is expected to achieve an upgrade in its search engine through AI."

In terms of stock price, Alphabet's stock has fallen 12% this year, placing it at the bottom among the seven tech giants, while the Nasdaq 100 index, known as a barometer for tech stocks, has risen 2.1%. Another online advertising giant, Facebook's parent company Meta Platforms (META.US), has seen its stock rise nearly 10% this year, and Alphabet's strongest competitor in the cloud computing sector, Microsoft (MSFT.US), has seen its stock rise over 9% this year, getting closer to its historical high.

Alphabet's stock price has underperformed the market this year - Investors are fully focused on the I/O conference

Recently, Alphabet's stock price has weakened, not only due to investors' concerns about the increasingly fierce competition in generative AI and the erosion of search market share but also because an Apple executive testified in court that the search volume of the Safari browser saw its first decline in April.

However, Alphabet rebutted this and pointed to the I/O conference, stating that it would showcase its latest innovations. Last week, The Information reported that Alphabet would unveil an AI agent for software development at the conference, as well as features similar to the popular social platform Pinterest and other updates for the Gemini AI chatbot. However, if the formal presentation is lackluster, the stock price may come under further pressure.

"Simply having a compelling storytelling approach may not be enough to persuade investors at this year's I/O conference, as we are now seeing the latest data showing a slowdown in paid click growth, the first decline in Safari browser search volume in 22 years, and competitors in generative AI applications like ChatGPT and Meta AI approaching a billion users," wrote Mark Shmulik, an analyst at Bernstein.

Strong competitors eye Google's search market share

Since the global popularity of ChatGPT at the end of 2022, Alphabet has faced multiple sell-offs due to investors' concerns about falling behind in the generative AI space. This factor, combined with uncertainties surrounding antitrust issues, has long suppressed Alphabet's valuation, making it one of the lowest-valued stocks among large tech companies.

In terms of talent and intellectual property, Alphabet is still regarded as a core player in AI, and its stock price has rebounded multiple times from lows. The company's most recent earnings report exceeded expectations and showed strong demand for AI-driven computing power and software subscriptions, while activities focused on cloud computing in April were seen as positive signals for its long-term profitability in the AI sector.

However, the strong rise of new AI contenders has put Alphabet on the defensive, especially in the search business—this segment accounts for over half of Google's parent company's revenue and contributes the vast majority of its profits. According to the latest data from Statista (March), Alphabet's overall share of the global search market is approximately 89.7%, down from 92.9% in January 2023, when ChatGPT was sweeping through the tech sector.

For Google, the current competitors that genuinely threaten its search engine market share and the online search business ecosystem, including digital advertising, are not only OpenAI, the developer of ChatGPT, but also another AI startup, Perplexity AI. Founded in 2022, Perplexity AI has gained popularity among global developers and researchers for its real-time, efficient, and accurate AI outputs and reasoning results, along with a user interface similar to a search engine. The "AI search" application provided by the company—Perplexity—can conduct in-depth research and can call upon AI large models other than its own, including those from OpenAI and Anthropic PBC The core difference between Perplexity and other AI chatbots' "AI search function" as well as Google Search Engine lies in its ability to provide more and more accurate real-time information, along with an ad-free AI search interface that is deeply integrated with AI technology. The precision of AI search results ranks at the top of the "AI search" field. Although its main service is AI search, this startup refers to itself as an "answer engine" because it provides refined search results in a textual format that integrates AI large models, and it details the links on which the search results are based, rather than merely displaying the searched links like Google Search Engine.

Ben Reitzes, the technology research director at Melius Research, stated that Alphabet "will undoubtedly go all out at the developer conference," but "to be more optimistic, we need to see Gemini monetized beyond expectations, enough to replace the existing search model." He warned that Alphabet risks losing young users to companies like OpenAI and Perplexity.

In terms of valuation, Google’s stock price has strong rebound potential

For investors, a crucial question is to what extent the stock price has reflected these concerns and what a reasonable valuation should be after the market share stabilizes in the long term.

Currently, Alphabet's expected price-to-earnings ratio is 16.4x, lower than its ten-year average valuation of 20.5x, and significantly lower than other tech giants and the Nasdaq 100 index, which is around 26x. Its closest peer, Meta, has an expected price-to-earnings ratio of 23x.

This valuation comes at a time when Wall Street analysts still expect strong long-term growth. Analysts generally anticipate that the company's revenue will grow at a double-digit rate annually by 2028. Even with Alphabet's significant investment in AI, net profit is expected to grow nearly 20% this year. Analysts expect the company's capital expenditures to be $74.9 billion this year, increasing to $77.1 billion by 2026.

Michael Brenner, a senior research analyst and asset allocation strategist at FBB Capital Partners, stated, "If Alphabet can integrate its outstanding technology, talent, data, and user base into a compelling innovative product at I/O, there is certainly room for the stock price to rise." "It is clear that the company's stock price appears cheap compared to other tech giants, but given the many growth questions facing its largest business, we have not assigned the highest weighting. If the threats do not dissipate, there is no resistance to a downward valuation."