After its launch in late 2022, ChatGPT quickly became the talk of the town, amassing an enormous following that persists to this day. Developed by OpenAI, this chatbot sparked a frenzy that drove up the prices of related stocks. For instance, C3.ai Inc (AI) shares surged in response to the ChatGPT hype.
Microsoft (MSFT) announced a $10 billion investment in ChatGPT. The tech giant even unveiled a new version of Bing that includes an artificial intelligence chat feature. What does this mean for Google? Could ChatGPT dethrone the search engine king?
Alphabet Vulnerable to ChatGPT
Over the past decade, search engine market share has remained relatively unchanged. Google, owned by Alphabet (GOOGL), continues to dominate with a staggering 93% market share, followed by Bing with just over 3%. However, Microsoft’s recent announcement about the ChatGPT-powered version of Bing triggered concerns that Google may be disrupted.
The impact of ChatGPT extends beyond Alphabet, as the company faces a “code red” threat to the future of its search engine. While some consider this a slight overreaction, the potential of ChatGPT technology cannot be understated.
The generative AI capabilities of ChatGPT represent the next phase of internet search. With the ability to provide specific answers to user queries, the technology circumvents the need to sift through multiple search engine pages. Moreover, it can answer follow-up questions and provide information from multiple sources.
Despite its impressive capabilities, there is one critical reason why Alphabet is vulnerable to ChatGPT; Google Search contributes to just over 56% of its total revenue, generating $42.6 billion in Q4 2022. The second-largest revenue stream is Google Other, which includes Chromebook, Chromecast, Pixel phones, and other products, generating around $8.8 billion.
Protecting Google’s Search Dominance Could Be Costly
Thus far, Alphabet’s Google search business has not faced substantial threats that have warranted pressing the panic button. Despite Alphabet’s diverse portfolio, a massive portion of its revenue stems from its online search operations. Any loss of market share could trigger the need to enter defensive mode, leading to a decline in profits and funding for other business segments. This could cause a problematic domino effect across the company.
What’s even more concerning is Alphabet’s struggle to diversify in recent years. The company has tried to branch out but has faced relatively little success. This led to the name change from Google to Alphabet in 2015, reflecting a vision for building a collection of “alpha” (aka market-beating) bets for shareholders.
Alphabet’s profitability has thus far supported its diverse business segments. If it were to face a significant threat to its core business, it may need to allocate more resources to protect its market share. This would undoubtedly reduce company profits and impede its ability to invest in other areas, creating a potential ripple effect across the company.
Can Microsoft Chip Away at Google’s Market Share?
Microsoft has made no secret of its intention to encroach on Google’s market share by capitalizing on the introduction of ChatGPT. The threat posed by Microsoft’s new technology is undeniable, and Alphabet has acknowledged this reality.
However, Alphabet finds itself in a difficult position since it is not unfamiliar with AI technology. The company has a long history of using AI to power its products, including its own large language model, LaMDA, which is described as a breakthrough conversation technology.
While Alphabet has been hesitant about using its AI technology for search operations due to concerns about accuracy, recent developments have prompted a change in the company’s stance. CEO Sundar Pichai announced last month the next step in the company’s AI journey, introducing Bard, an experimental conversational AI chatbot powered by LaMDA. Although Bard has been somewhat underwhelming, with errors highlighted in its first demo, the development is necessary for Alphabet to remain competitive.
The errors in Bard’s performance underscore a critical problem: AI chatbots may not be ready to replace search engines solely because they can make things up. While Alphabet is making progress in developing its AI technology, there is still much work to be done before it can be used effectively in the search engine market.
Should You Invest in Microsoft or Alphabet?
Investors in Alphabet need to keep a close eye on the intensifying search engine rivalry, fueled by the launch of ChatGPT. To maintain its search dominance, Alphabet must out-innovate Microsoft and invest money in its products.
However, despite the recent market turbulence, it’s important to remember that Alphabet is a massive company with a market capitalization near $1 trillion. While Alphabet faces new challenges, it still has plenty of capital and talent to combat threats from outside.
Microsoft, like Alphabet, has been a strong performer over the past decade, and its investments in cloud computing and AI could lead to further growth. Additionally, it offers a modest but growing dividend.
The bottom line is both Alphabet and Microsoft are worthy of investment. They each produce massive cash flows and can innovate rapidly to address competitive threats. To hedge your bets with Alphabet, owning Microsoft is a smart option.