This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Shares of Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) are down 12% so far in 2025. The Google owner is underperforming the Nasdaq Composite, which has rallied in recent weeks and is only down about 1% year to date at the time of writing.
At first glance, the stock appears to be a no-brainer buy. This is one of the largest and most profitable companies in the world, with a very strong brand in Google. But some investors are questioning Google's competitive position, especially in search. More people seem to be using OpenAI's ChatGPT and other leading artificial intelligence (AI) models as a substitute for Google Search.
We'll explore what this means for Google. But I believe investors could be greatly underestimating the company's AI capabilities.
Google Search is facing a new level of competition
Top AI models like OpenAI's ChatGPT and xAI's Grok could be pulling users away from Google Search, since these models can be used as search engines. Alphabet stock fell sharply earlier in May after reports surfaced that Apple experienced a decline in Google Search volumes through its Safari browser for the first time in April, which Apple is blaming on AI.
Perplexity is one model that has taken a big step to compete with Google. It has a partnership with Shopify that allows users to buy products they find while using Perplexity. Shopify could reach a similar deal with OpenAI. This is a real risk for Google, since Search is widely used by people when shopping online.
Adding fuel to the negative sentiment around Alphabet, its first-quarter earnings report showed that paid clicks for the ads displayed in search results grew just 2% year over year, compared to 5% in the year-ago quarter. This is not what investors want to see, given that Search revenue comprised 56% of the company's total revenue last year.
But Google's AI is second to none
One problem with the market's reaction to the report about Apple is that Safari search volumes don't paint a complete picture of Google's competitive position. Google Search has over 2 billion users making over 5 trillion searches annually. Alphabet was quick to offer more detail for investors following the news on Apple. "We continue to see overall query growth in Search," the company said, while also noting: "That includes an increase in total queries coming from Apple's devices and platforms."
Alphabet's competitive position could be much stronger than investors realize. Google's Gemini is currently ranked the top AI model on Chatbot Arena's leaderboard. It scores very high in areas like science and mathematics, and also scores well in using a large amount of information at once. Gemini is powering the AI features across the company's products, including AI Overviews in Search, which has 1.5 billion monthly users.
While the 2% increase in paid clicks showed some softness in the advertising business, Alphabet's first-quarter financial results were solid. Revenue grew 14% year over year on a currency-neutral basis. CEO Sundar Pichai credited the strong results to Google's "unique full-stack approach to AI," which refers to the comprehensive solution it offers businesses wanting to use AI, such as hardware, software, and cloud services.
Why the stock is a buy
The heart of Google's advantage lies in its data centers and AI infrastructure, including its proprietary AI chips, or Tensor Processing Units. It's one of the leading hyperscalers (data center operators), and that positions the company for more growth as more businesses invest in cloud and AI services. Google Cloud's revenue surged 28% year over year last quarter to an annual run-rate of $49 billion.
Despite the increased competition in search, the stock appears undervalued. It's trading at just 19 times earnings -- a steep discount to the S&P 500 average of 28.
Despite near-term pressure on margins due to AI investments, analysts expect the company's earnings to grow at an annualized rate of nearly 15% in the coming years, which could potentially double an investment in Google over the next five years.
Investors should take the threat from ChatGPT, Perplexity, and other AI model makers seriously. A significant loss in users could hurt Google in the long run. However, there are not just 2 billion users in Search. Google has 2 billion users across seven services. Its ecosystem, including Gmail and YouTube, still gives the company a strong competitive advantage that could be nearly impossible for competitors to supplant.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
