Wall Street's Bull-Bear Debate: Valuation Discount, Is Google Undervalued or Trapped in the "Innovator's Dilemma"?

After the earnings report was released, Google's parent company Alphabet (GOOGL.US) has become one of the most talked-about stocks on Wall Street. Previously, the company reported strong second-quarter earnings (revenue increased by 14% year-on-year, operating profit increased by 32%), successfully rebutting critics who had predicted an imminent collapse due to the impact of artificial intelligence.

However, there remains significant divergence regarding the future direction of Alphabet, with investors split in their opinions: some believe it will continue to maintain its dominance, while others are concerned about regulatory pressures and competitive threats.

This debate revolves around several key questions: Will AI chatbots like ChatGPT and Perplexity erode Google's lucrative search business? Can Google successfully commercialize its own AI projects? Will the increasingly stringent regulatory scrutiny in the U.S. and EU prompt structural changes to Alphabet's business model?

Given that the company's stock valuation is relatively low compared to other tech giants, investors must weigh whether this is a value investment opportunity or if the company is indeed facing survival challenges in a rapidly changing digital environment.

Overall, investors are concerned about whether Alphabet has fallen into the innovator's dilemma. The innovator's dilemma refers to the management phenomenon where excellent companies lose their competitive advantage due to organizational inertia and demand mismatch when facing breakthrough changes in market technology.

Basic Information

Alphabet operates the world's most powerful search engine, Google. The company's business scope is not limited to search but also includes YouTube, Android, Google Chrome, Google Cloud, and numerous "other investment projects," such as Waymo (autonomous driving technology). Google's search engine processes billions of queries daily and generates most of the company's revenue through advertising.

YouTube is the second-largest search engine globally and contributes significantly to Alphabet's advertising revenue. Google Cloud has developed into a major competitor in the cloud computing space, with annual recurring revenue reaching $50 billion.

Currently, the company has strong profitability, with an operating profit margin of 32.4%, well above the industry average. Growth indicators are performing well, with revenue growth of 14% year-on-year in the most recent quarter.

However, valuation issues have impacted its overall rating. The company's expected price-to-earnings ratio is 19.5 times, lower than the average of 22.4 times for the S&P 500 index and nearly 30 times lower than the average of other tech stocks among the "seven major tech giants." Google's stock is currently trading at $192.39, with a year-to-date increase of 1.1% and a 12.5% increase over the past year. The stock has retreated from its 52-week high of $208.70 but remains well above its 52-week low of $142.66. Following the recent second-quarter earnings report, the stock price saw a significant positive reaction, as the company's reported performance exceeded expectations, alleviating some investors' concerns about the impact of artificial intelligence and showcasing the strength of its core advertising business Competitive Pressure

Alphabet is facing increasingly fierce competition from traditional rivals as well as emerging companies focused on artificial intelligence. In the United States, the Department of Justice has accused Google of holding an illegal monopoly in the advertising market and having a monopoly in the search domain. The government is seeking relevant remedies, which may include selling Google's Chrome browser and advertising exchange business. In the European Union, Alphabet is also facing similar regulatory challenges, including potential fines of up to 10% of its global revenue for violating the Digital Markets Act.

In addition to regulatory pressure, companies like OpenAI and Perplexity are developing AI-based search alternatives that could threaten Google's core business, while Apple (AAPL.US) is reportedly considering developing its own search functionality or acquiring AI search companies like Perplexity.

Bull/Bear Debate

Bears argue that Alphabet faces survival challenges on multiple fronts, and even though it is currently profitable, this still poses significant investment risks. The most concerning issue is that AI-based alternatives like ChatGPT and Perplexity are replacing traditional search behaviors, which could undermine Google's core profit engine, accounting for about two-thirds of its profits.

Moreover, regulatory pressures in the U.S. and EU could force Alphabet to change its business model, potentially including the sale of key assets such as the Chrome browser and its advertising trading platform. Critics also point out that even Google's own AI projects face a dilemma: resist the AI transformation and lose market share, or embrace it and erode its lucrative search advertising business.

Bulls counter that Alphabet's performance in the second quarter indicates resilience rather than fragility; despite facing competition from AI, search revenue still grew by 12% year-over-year. Supporters argue that AI features such as "selected search" and "AI overview" are actually increasing rather than decreasing search engagement, bringing an additional 4% to 6% in ad impressions. The impressive 31% revenue growth in Google Cloud and expanding profit margins (21% in the second quarter) demonstrate the success of Alphabet's diversification strategy and justify its large capital expenditures.

Optimists also point out that compared to other tech giants, Alphabet's valuation is relatively low, with a forward P/E ratio of 12 times EBITDA, while its average P/E ratio over the past 10 years has been 12.7 times, indicating that the market is underestimating its competitive advantages and growth potential.

Chartered Financial Analyst (CFA) Jussi Askola has given Alphabet a "sell" rating, stating: "Currently, most investors are optimistic about Alphabet/Google. However, they seem to overlook a very important risk. Yes, Google is a leader in the field of AI, but it will still erode its most profitable business... I have replaced over 90% of Google searches with AI tools like ChatGPT "I really don't want to use Google anymore... AI tools like ChatGPT, Claude, Perplexity, and Grok are much more efficient than Google in finding accurate information."

The short-selling organization Bears of Wall Street has given a "sell" rating and stated: "Alphabet is facing significant regulatory pressure that could disrupt its business model. In the United States, Alphabet is accused of having an illegal monopoly in the publisher ad server market and the ad trading platform market. Therefore, the U.S. Department of Justice wants the company to divest its ad trading platform and ad server business, which could weaken Alphabet's dominance in the search industry."

Research firm JR Research stated: "The company has faced numerous challenges in convincing the market that it will not be disrupted by the rise of artificial intelligence. After all, companies solely engaged in AI are working to break Chrome's monopoly in the market, attempting to guide users to use browsers powered by proxy AI, fundamentally changing our perception of existing search methods."

However, after Alphabet released a strong second-quarter earnings report, Goldman Sachs raised its target price for the stock from $225 to $234. Goldman Sachs believes that Alphabet's accelerated investment in artificial intelligence (AI) will drive long-term growth in its core business. Goldman Sachs stated that Alphabet's latest earnings report shows that its search, YouTube, and cloud business segments continue to perform strongly, but emphasized that the company's evolving AI strategy will be a major driver of future value.

Truist Securities also raised Alphabet's target price from $200 to $225 while maintaining a "buy" rating. The firm noted that despite intensified AI competition and macroeconomic uncertainties, Alphabet's execution remains strong. Additionally, JMP Securities reiterated its "outperform" rating on Alphabet and maintained a target price of $225.

JP Morgan maintained its "overweight" rating on Alphabet and set its target price at $232. This investment bank noted that Alphabet has become one of the "most talked-about stocks" within its research coverage, with recent investor discussions focusing on the upcoming judicial ruling regarding compensation measures in the search business agreement case. Despite legal uncertainties, JP Morgan described Alphabet's recent quarterly performance as a "defining quarter" for the company and further solidified its bullish stance on the stock