Shares of Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) continued to sputter after its Q2 earnings results on news that OpenAI is testing a new artificial intelligence (AI) search engine. The stock is now over 12% off its recent highs but still up about 21% on the year.
Let's take a closer look at OpenAI's new search engine and what it could mean for Alphabet and its stock.
A new search competitor
OpenAI's new search engine, called SearchGPT, is currently a prototype and will become available to 10,000 test users upon launch. Instead of just providing links to search queries, the search engine will try to organize and interpret results for the user in a more digestible way.
The company will look to chip away at the enormous market share that Alphabet's Google search engine has in the space, estimated at around 90%. The entrance of OpenAI into the search space is not much of a surprise, nor is it the first AI-powered search engine to try and challenge Google's dominance. That honor belongs to Perplexity.AI, first launched in December 2022.
Should investors worry about an upstart like SearchGPT impacting Alphabet's financial results and, ultimately, its stock price? I wouldn't worry too much at this point.
SearchGPT is still very much in its infancy, and even the company's small demo that it provided came with an important mistake. As pointed out by The Atlantic, in the company's presentation, a user typed in "music festivals in boone north carolina in august," to which the company pulled up a list of music festivals and descriptions.
The problem was that the first festival it pulled up had the wrong concert dates. Instead of providing the concert dates, the search engine mistakenly listed the concert dates as the dates when the event's box office was officially closed. The festival's final concert, meanwhile, was July 27, and nothing was happening in August.
Google and Perplexity.AI have had their own missteps, as well, from Google AI mistakenly telling users to add glue to pizza to make cheese stick better to Perplexity.AI being accused of plagiarizing the work of journalists and authors. The technology and results from all involved will undoubtedly improve over time, but it also doesn't look like any company has a huge lead in AI search results at the moment.
Image source: Getty Images
Google's advantages
Google does have some pretty nice advantages. The biggest is that the company is synonymous with search, so much so that its name is used as a verb for searching the internet. If you need proof, just google "is google synonymous with search." The company also has a huge user base and decades of search data from which to help train AI models, as well as YouTube and its Adsense network.
There's also the matter of funding. OpenAI has grown rapidly, but it's also losing a lot of money in the process. The website The Information says that the company will spend $7 billion on AI training and inference this year and lose $5 billion. It also projects the company will have to raise more cash this year to fund its operations.
Alphabet, meanwhile, is a cash-flow machine. The company spent over $32 billion in capital expenditures (capex) alone last year and still generated free cash flow of $69.5 billion. It will win any spending war.
At the same time, OpenAI and Perplexity.AI will not only have to win on the technology front, they'll also need to learn to monetize their users. Running AI-powered search is expensive, and neither company has the advertising clout of Google. AI results, meanwhile, open up a whole new ad market for Google.
The search giant currently only displays ads on about 20% of the search queries run on its site but is set to test search and shopping ads with its new AI Overviews. This opens up a whole new revenue stream for the company on a large percentage of the searches it wasn't currently monetizing. That's a big opportunity.
OpenAI and Perplexity.AI, meanwhile, need to improve upon their AI-powered search technology, take share from Google, successfully monetize their user bases, and gain enough scale to obtain profitability and make it worthwhile. They may eventually also have to pay a lot of licensing fees for the answers they provide, adding to the costs. Thus, it will be no easy task for these start-ups.
Time to buy the dip?
Despite the increased competition from start-ups, Alphabet is still the search company in the best position to be the ultimate winner in search. So far, the challenge from Perplexity.AI hasn't impacted results, as shown by the strong 14% jump in search revenue the company saw last quarter. Meanwhile, I don't expect the entrance of SearchGPT to have a meaningful impact, either.
Google just has too many advantages for challengers to overcome. Even if other companies take some share, the company's opportunity to widen its search monetization beyond 20% of its results is a huge opportunity.
With the stock trading at a forward price-to-earnings (P/E) ratio of just over 19, based on 2025 analyst estimates, the stock is one of the least-expensive large-cap tech stocks out there.
GOOGL P/E Ratio (Forward 1y) data by YCharts.
I'd be a buyer of the stock on this recent weakness.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Geoffrey Seiler has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
