Alphabet Stock Is Having a Bad Year. How AI Can Make or Break the Google Parent.

Alphabet, the parent company of Google, TKTK (Justin Sullivan/Getty Images)

Alphabet shares have tumbled this year as the Google parent contends with competition on the artificial-intelligence front. In what’s shaping up to be a difficult time for the tech behemoth, Alphabet’s investments in AI will be either be a blessing or a curse, depending on who you ask.

In a research note Friday, Citizens JMP analyst Andrew Boone upgraded Alphabet stock to Outperform from Market Perform and set a $220 price target on the shares. Shares fell 0.3% to $173.06 in afternoon trading, while the Nasdaq Composite rose 0.5%.

In Boone’s view, while OpenAI is a formidable rival, “AI is a net tailwind, with ChatGPT’s impact too small today to move enough queries away from Google to materially impact results.” OpenAI’s 800 million weekly active users compare to some 5 billion for Google, and its AI Overviews service—a summary of Google search results—has the potential to boost query growth.

Crucially, “AI is expanding the search opportunity by answering a broader array of queries and extending monetization as AI better infers user intent,” Boone wrote. He is most positive on Smart Bidding Exploration and AI Max for Search Campaigns, two Google advertising tools that allow Alphabet to commercialize more searches than in the past.

Apple itself has acknowledged the impact of AI assistants. Eddy Cue, the company’s senior vice president of services, testified in federal court last month that Google’s search traffic on Apple devices declined in April for the first time in over 22 years. The culprit? Alternatives like ChatGPT.

Speaking of Apple, the iPhone maker remains the “key risk” to Boone’s bullish argument. The last downgrade of Alphabet stock at Citizens JMP centered on “potential headwinds from anti-trust penalties,” Boone noted. The looming outcome of a remedies trial, in which penalties are determined, could cause Google to “materially lose distribution,” he said.

The remedies trial comes after a judge ruled in 2024 that Google had monopolized open-web digital advertising markets. The company paid Apple billions of dollars to make Google the default search engine on Apple devices in what constituted an anti-competitive practice, the judge argued. Google has vowed to appeal the ruling and maintains that it “achieved its popularity and success through innovation.”

Legal challenges aside, other analysts believe Alphabet is in no position to outperform its peers on the AI front. In a note Thursday, BNP Paribas Exane analyst Stefan Slowinski downgraded Alphabet shares to Neutral from Outperform. The firm has a $172 price target on the shares.

Slowinski’s investment thesis hinges on broader trends among hyperscalers, or large cloud service providers. Alphabet reiterated in April that it planned to invest around $75 billion in capital expenditure this year, primarily to build out data-center capacity to keep up with demand for computing power needed for AI services.

With capex for the big four hyperscalers —Alphabet, Amazon.com, Meta Platforms, and Microsoft —reaching record highs, Slowinski sees the depreciation-to-sales ratio rising from 6% to 18% by the end of the decade.

The analyst expects rising depreciation costs to influence the profitability of Alphabet and competitors. “While the hyperscalers have delivered EPS growth well ahead of the S&P 500 average over recent years, we see EPS growth between the two groups likely to converge,” Slowinski wrote.

His opinion draws a stark contrast to the consensus on Wall Street. Of 72 analysts polled by FactSet, 60 rate Alphabet at Buy or the equivalent while 12 rate it at Hold. None rate the stock at Sell.

Write to Mackenzie Tatananni at mackenzie.tatananni@barrons.com