In a recent note, Loop Capital analysts highlighted concerns surrounding Alphabet (NASDAQ:) amid YouTube advertising challenges and the emerging competitive threat from OpenAI’s SearchGPT prototype.
Loop Capital maintained its $170 price target and hold rating on Google shares, expressing caution despite some positive aspects of Google’s financial performance.
Google’s sell-off last week was attributed to weakness in YouTube and the failure of Google’s network, which reflects a weak advertising environment.
While higher search revenues offset the shortfall, overall ad revenues managed to beat consensus. However, the composition of those revenues has raised questions among investors, according to the company.
“The group sold its shares last week in response to YouTube’s weakness and Google’s failure, which is seen as a reflection of a weak advertising environment,” Loop Capital noted.
They stressed that “Google’s fundamental valuation of whether it should be valued at 15 times earnings or 20 times earnings is what separates the bulls from the pessimists.” Given the current uncertainty, they lean toward a more conservative valuation of 15 times earnings.
An important source of this ambiguity stems from the competitive dynamics introduced by generative artificial intelligence (genAI), particularly the recent unveiling of the SearchGPT prototype by OpenAI.
“We believe Google will significantly improve its search product with genAI,” the analysts acknowledged, but they also warned of the growing risk of “query volume being eroded by other AIs.”
This new competitive landscape is expected to create “a wall of concern for investors at the very least,” according to Loop Capital. As tech giants like Meta, Amazon, Snap, and Pinterest report earnings, along with many ad tech companies, more clarity will emerge about the advertising environment and competitive pressures.
In conclusion, while Google’s advances in AI may enhance its research capabilities, the competitive threat from other AI platforms is a major concern for investors, calling for a cautious approach in the near term.