Fear that Alphabet has become complacent

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Fear that Alphabet has become complacent
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Its collapse on the stock market due to an error in its AI reveals the doubts, perhaps exaggerated, of investors

Alphabet’s new chatbot has played a trick on him. The artificial intelligence program made a mistake when answering a question, and Wednesday’s big presentation of new AI features for search came to nothing. As a result, the market has laminated some $200 billion of the company’s $1.14 trillion market capitalization. That’s probably an overreaction, but the perception that Google has become complacent could be hard to shake.

Alphabet had been testing its Bard bot for some time, and just as it was unveiling it, Reuters revealed that a question it answered in an ad was wrong. The machine said that the James Webb Space Telescope had taken the first image of an exoplanet. In reality, a European satellite had taken the first image 18 years earlier.

That, coupled with a disappointing launch, sent the shares down 12% between Tuesday night and Thursday. A day earlier, rival Microsoft unveiled and launched a version of its search engine, Bing, loaded with artificial intelligence capable of answering complex questions using multiple sources of information.

Microsoft, which is not a minor competitor, hopes that being better translates into a more competitive search market. The CEO, Satya Nadella, said in an interview with the Financial Times that the gross margin in that industry will fall forever. If you’re right, Alphabet has an existential problem. The gross margin was 55% last year, with 157,000 million. If this figure is halved, Alphabet’s profits could be wiped out if it doesn’t apply serious cost cutting.

Even so, a breakthrough and successful launch of AI in search is at this point theoretical, and Alphabet’s business is locked in for now. It dominates, with more than a 90% share of global searches, according to Statcounter. Good technology is a proven disruptor, but being in place has long had strong advantages. Habits die hard, customers are lazy, and the costs of a change are high. Google, Microsoft, Amazon and Meta continue to control their respective niches.

Perceived threats are more difficult to avoid. Microsoft knows this well. In the decade leading up to 2014, when Nadella became CEO, profits more than doubled. However, investors feared that the firm was more concerned with squeezing its customers than beating its online competitors. The earnings multiple was cut in half, to around 10. The stock barely budged for a decade, until Nadella’s cloud services push changed the story.

Since then, Microsoft’s stock has risen dramatically: it’s worth 10 times what it was in 2004. A shutdown might not be so bad at Alphabet if it ended up the same way, but for shareholders, uncertainty is unpleasant.

Textbooks

AI is already causing a hunt for winners and losers among investors. The Chegg college textbook rental company is at risk of becoming one of the latter. Its shares slumped by nearly a fifth on Tuesday after he forecast a decline in revenue in 2023. Although his boss, Dan Rosensweig, told analysts he had seen no effect from the rise of sophisticated chatbots like ChatGPT, From OpenAI and Microsoft, it’s hard to see how AI won’t hurt an industry already facing widespread decline.

The main problem for firms like Chegg is that falling college enrollments are already translating into fewer future clients. To grow, Chegg must win an increasing share of a shrinking market. ChatGPT could have significant effects on the education market: the bot has already passed some Law and Business exams, albeit not with marks. Rosensweig argues that Chegg can use the technology to its advantage, matching students with the right content and creating personalized study plans.

Investors aren’t as confident, judging by the stock’s 30% drop so far in 2023. That’s more than the 20% drop in analysts’ 2023 earnings forecasts, according to Refinitiv. In contrast, other companies that have begun to put AI into practice, such as the BuzzFeed portal, have seen their shares soar. All investment fads generate unexpected winners. Given their enormous disruptive potential, the rise of intelligent chatbots will also create losers, both real and perceived.

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Brian Adam
Professional Blogger, V logger, traveler and explorer of new horizons.