In a recent note, Loop Capital analysts highlighted concerns surrounding Alphabet (NASDAQ:GOOGL) amidst YouTube's advertising challenges and the emerging competitive threat from OpenAI's SearchGPT prototype.
Maintaining their $170 price target and Hold rating on GOOGL shares, Loop Capital expressed caution despite some positive aspects of Google's financial performance.
Last week's sell-off in GOOGL shares was attributed to weaknesses in YouTube and a miss in Google Network, reflecting a softening advertising environment.
Although search revenue upside compensated for the shortfall, overall ad revenue managed to beat consensus. However, the composition of this revenue has raised several questions among investors, according to the firm.
"The group sold off last week in reaction to YouTube weakness and a miss at Google Network, seen as a reflection of a softening ad environment," Loop Capital noted.
They emphasized that "whether core Google should be valued at 15X earnings or 20X separates bears from bulls." Given the current uncertainties, they lean towards the more conservative 15X earnings valuation.
A significant source of this uncertainty stems from the competitive dynamics introduced by generative AI (genAI), particularly OpenAI's recent unveiling of the SearchGPT prototype.
"We think that Google will meaningfully improve its search product with genAI," the analysts acknowledged, but they also warned of the growing risk of "erosion of query volume to other AIs."
This new competitive landscape is expected to create "a 'wall-of-worry' for investors at a minimum," according to Loop Capital. As tech giants like Meta, Amazon, Snap, and Pinterest report their earnings, alongside various adtech companies, more clarity on the ad environment and competitive pressures will emerge.
In conclusion, while Google's advancements in genAI may enhance its search capabilities, the competitive threat from other AI platforms presents a significant concern for investors, warranting a cautious approach in the near term.