It’s Alphabet (GOOGL) versus Microsoft (MSFT) in artificial intelligence — and after decades of owning search, Google finds itself looking over its shoulder. While the Club owns both stocks, we’re most concerned about Alphabet at the moment as it plays catch up in the AI arms race and faces a government antitrust lawsuit over its online advertising dominance. Last week was brutal for Alphabet shares. Microsoft last Tuesday unveiled surprise plans for an AI-enhanced version of its Bing search engine, which barely has any market share. In response, a day later, Google held its own AI event — showcasing Bard, its answer to ChatGPT. It was a flop. The back-to-back decline last Wednesday and Thursday in Alphabet stock was the biggest two-session losing streak since March 2020. Wall Street’s rebuke of GOOGL last week reflects our worries that if a new Bing — pow e red by Microsoft-backed OpenAI , maker of viral sensation ChatGPT — were to gain a foothold in search, Alphabet’s online ad dominance could be threatened. The Justice Department’s suit could also shake up the ad market. Alphabet’s business model depends on revenue from online ads. The company delivered full-year 2022 total revenue of $282.84 billion — 79% of which came from the Google advertising line item, according to the company’s latest 10-K filing with the Securities and Exchange Commission. “I question the Alphabet business model right now,” Jim Cramer said last week. “They’ve got to do something fast.” GOOGL MSFT 3M mountain Alphabet (GOOGL) vs. Microsoft (MSFT) 3-month performance Alphabet shares plunged more than 9.5% over the past week, shedding $135 billion in market value, according to FactSet, ending last week with a market cap of $1.21 trillion. For comparison, Microsoft shares fared better on the week. To be fair, tech stocks overall had been recently struggling as of Friday’s close after a roaring start to 2023. However, on Monday, tech shares were higher, with Microsoft rising more than 3.5%. Alphabet was on either side of unchanged. In a research note on Friday, Jefferies called the steep decline in Alphabet’s stock “overdone.” While Bard was dinged in reports for an incorrect description in a promotional video, Jefferies analysts wrote, “There are many examples of ChatGPT producing inaccurate or misleading answers.” The Jefferies note leans on insights from a discussion with an artificial intelligence expert, who formerly worked as a product lead at Google AI. “The quality of large AI models is highly dependent on quality of data,” and Google search has a huge lead given usage of Search, Chrome and Android, Jefferies analysts argued. Jefferies reiterated its buy rating on GOOGL, with a price target of $130 on the stock, which closed Friday under $95 per share. The ongoing overhang on Alphabet from the DOJ’s antitrust lawsuit is troubling and confusing. “It is tough when you have the Justice Department saying you have a monopoly and when you have the monopoly being destroyed at the same time by Microsoft,” Jim said. Announced late last month, the DOJ’s suit accused Google of “anticompetitive conduct” over the digital advertising market. Eight states also signed on to the antitrust suit against Alphabet, which is calling for the company to divest its ad tech business. Evercore ISI said in a recent research note that this ongoing regulatory battle with the government “carries only modest fundamental risk such as “higher overhead expenses, management distraction and possible ad market tentativeness.” Evercore has an outperform, or buy-equivalent, rating and a price target of $120 per share. Google responded to the DOJ suit in a blog post, claiming it’s “one of hundreds of companies that enable the placement of ads across the internet. And it’s well reported that competition is increasing as more and more companies enter and invest in building their investing businesses.” Bottom line It’s no surprise to see Alphabet’s stock down on the growing competition from Microsoft’s AI-powered technologies. Alphabet’s business is largely run off ads and there’s a growing possibility that the improved capabilities of Bing could attract at least some users away from Google search. Jim also called the DOJ’s antitrust ad suit “brutal.” He added that it’s been an “embarrassing three weeks” for Alphabet, which included a sharp drop the day after reporting weaker-than-anticipated fourth-quarter results on Feb. 2. The market for AI-powered chatbots is still in the early days, which is why we wouldn’t be surprised if other players jump into the AI race. “Meta has something lined up big,” Jim said, referring to Club holding Meta Platforms (META), though he did not provide further details. If the rise of chatbots becomes more prevalent, Alphabet may find it more challenging to incorporate ads on its platforms. We are not acting on this development but are keenly aware of the risks. (Jim Cramer’s Charitable Trust is long GOOGL, MSFT, META. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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It’s Alphabet (GOOGL) versus Microsoft (MSFT) in artificial intelligence — and after decades of owning search, Google finds itself looking over its shoulder. While the Club owns both stocks, we’re most concerned about Alphabet at the moment as it plays catch up in the AI arms race and faces a government antitrust lawsuit over its online advertising dominance.
