Google has a distinct advantage over OpenAI’s new SearchGPT platform.
OpenAI is the developer of ChatGPT, an online chatbot powered by artificial intelligence (AI). It’s capable of instantly generating text, images, videos, and computer code on command, and it’s recognized as an industry leader — including by Microsoft, which agreed to invest $10 billion in the start-up last year.
Last week, OpenAI announced plans to launch an internet search engine called SearchGPT, which will use its AI models to pull live, up-to-date information from the internet in response to users’ queries. It will compete directly with Alphabet‘s (GOOG -2.35%) (GOOGL -2.40%) Google Search, which has dominated the internet search industry for more than two decades.
But I don’t think investors should rush to sell their Alphabet stock on this news. Here’s why OpenAI will find it very hard to beat the tech giant.
Image source: OpenAI.
Google survived the first wave of AI disruption
Investors initially feared AI chatbots could upend the dominance of Google Search as a primary source of information online. Chatbots can provide direct answers to questions, so they are more convenient than traditional search engines that require users to sift through web pages. Investors grew especially concerned when Microsoft integrated ChatGPT into its Bing search engine because it posed one of the largest threats Google had faced to date.
But Alphabet mounted a strong response. It built its own chatbot, called Bard, which has since been replaced by a more advanced family of AI models, called Gemini. Plus, Alphabet recently launched AI Overviews for Google Search, which are detailed text-based responses that appear at the top of the web results. In essence, Overviews creates a hybrid experience by combining chatbot-like responses alongside the traditional search engine.
AI Overviews include links to source material, so the user can still visit the website which the information was pulled from. Alphabet says the links embedded in Overviews are receiving more clicks than they would typically receive in traditional web results, which means they might even boost the company’s advertising revenue.
And here’s the most important thing: Google Search still has a market share of 91% in the internet search industry, so the attempts to disrupt it with AI haven’t really made a dent so far.
It’s true that SearchGPT (which is still in prototype mode) will introduce new features into the world of search. For example, after entering a query and viewing the first set of results, the user can ask follow-up questions, and SearchGPT will use context from previous interactions to dive deeper and deliver more refined information. This is something Google Search doesn’t offer.
Plus, OpenAI is already working with organizations like News Corp and The Atlantic to promote journalism on SearchGPT, ensuring that quality, reputable content is prioritized.
But Alphabet has something else working in its favor, and it might be the most critical point of all.
Alphabet has the smartphone market locked up, and that’s bad news for OpenAI
Over 61% of global internet traffic comes from mobile devices, and that number is consistently growing. Alphabet owns the Android operating system, which is used in over 40% of smartphones in the United States. Alphabet also owns Chrome, which is the default internet browser within Android. Since Google Search is the default search engine within Chrome, it’s the search engine of choice for almost all Android smartphones across the U.S.
I can’t envision a scenario where SearchGPT unseats Alphabet’s own search engine on the smartphone operating system which it owns.
But it gets worse for OpenAI. Practically every other smartphone user in the U.S. has an Apple iPhone, which has a market share of almost 59%. Alphabet pays Apple an annual fee to set Google as the default internet search engine on its Safari browser. In 2022, that yearly fee topped $20 billion.
Practically no other player in the search business can match that — OpenAI generates a mere fraction of that in annual revenue — so Google basically owns the entire internet search market for smartphones in America.
You might think Alphabet’s stranglehold on the smartphone industry sounds monopolistic and maybe even unfair. The U.S. Department of Justice would agree with you. It filed an antitrust lawsuit against Google in 2020, and it argues that those yearly payments to Apple are anticompetitive because they make it almost impossible for new entrants like SearchGPT to win market share on merit.
The case is ongoing, but the judge is expected to hand down a decision later this year, and if it falls in the government‘s favor, it could create a much better environment for OpenAI.
Don’t rush to sell your Alphabet stock
Alphabet is an incredibly cheap stock. Based on the company’s trailing-12-month earnings per share of $6.97 and its recent stock price around $170, it trades at a price-to-earnings (P/E) ratio of just over 24. That’s a roughly 20% discount to the Nasdaq-100 index, which trades at a P/E ratio around 31, implying that Alphabet is undervalued relative to its big-tech peers.
Google Search accounts for more than half of Alphabet’s total revenue, so the company will suffer if it loses some of its dominance. It’s unclear what the outcome of the Department of Justice’s lawsuit will be — Alphabet could face a fine if it loses, or receive a more severe punishment that would force it to compete for market share as opposed to paying Apple. Remember, though, it still owns Android.
With that said, there’s more to Alphabet than search alone. The conglomerate is home to YouTube, autonomous driving company Waymo, and Google Cloud, which is now its fastest growing segment. Investors are getting a great price for this diverse company right now, so this is probably a good time to buy rather than sell.
