When GoogleGOOGLE Parent company Alphabet reported third-quarter earnings on Oct. 26, with shares falling about 10%, its worst day in more than three years.
The sell-off, which came despite a sharp improvement in profits, was driven by reduced growth in Google’s Cloud division, where revenue fell $20 million below analyst expectations.
The stock has since recovered and closed Friday’s session at $132.59, an increase of about 8% from the stock price immediately following the earnings report.
But Ark Invest, led by prominent asset manager Cathie Wood, doesn’t see a particularly bright future for Google and Alphabet shares. The reason comes down to artificial intelligence.
Related: Why Google Stock Is Sinking and Where It Might Go Next
Google ‘caught in innovator’s dilemma’: Ark executive
The technology giant, according to Brett WintonArk’s chief futurist, he is “caught between the thorns of an innovator’s dilemma.”
Google currently makes money by using ads to direct users to other websites.
Large language models like ChatGPT eliminate this path entirely, taking the information to all websites, synthesizing it, and delivering it directly to users.
Google, he said, should be winning in ai: The Mountain View, California, tech giant has “the best talent, the best data; they own the text box at the front of the consumer web.”
But the company is not launching its ai integrations (Gemini) because, according to Winton, such an innovation would “break Google’s revenue architecture” while increasing costs.
Cathie Wood sees ai risk for Google
Cathie Wood, CEO and investment leader at Ark, weighed in on the topic on Nov. 12, saying Google remains a “safe” ai holding in many portfolios because of its ai expertise and trove of data.
“The problem”, she saying“is that (big language models) like GPT4 are going to disintermediate and perhaps destroy Google search, the majority of its business.”
Ark’s preferred ai bet is TeslaTSLA, which the company believes is loaded with tons of usable data and transformative technology. The foundation of Ark’s Tesla ai thesis is the company’s effort to apply the technology to innovate autonomous vehicles.
Related: Cathie Wood Has a Strong Warning About Tesla Stock in the Coming Months
Munster: Google’s approach is the right one
Deepwater’s Gene Munster says, however, that once Google integrates Gemini into its main search engine, “the balance will tip towards Google and we will see a new acceleration.”
The tech company’s cautious rollout of ai integrations, according to Munster, is a good thing. You are spending carefully, with the goal of accelerating returns on expenses. And the company still has a unique advantage over the competition with its strong share of the search engine market.
“What Google wants to do is take what Google uses today and add generative features to it,” Munster said in October. “As they add that, over time they will turn to Google more and have more opportunities to monetize search. Big picture: Google’s history is intact.”
MNTN CEO Mark Douglas told TheStreet in an interview in November that Google’s biggest current advantage is that it has developed consumer “muscle memory” based on its search engine.
As of June 2023, Google had a 90% share of the search engine market, according to SimilarWeb.
But the coming proliferation of ai, Douglas said, will likely erase any technical advantage Google has over the competition and further erode that vital consumer muscle memory.
“Google has enough momentum that it won’t feel this for quite some time,” he said. “But the main point is that no one has an advantage in these things.”
Related: The president of Ryan Reynolds’ MNTN advertising company explains his new path to success
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