Alphabet’s Complacency Costs $150B

Alphabet, the parent company of Google, saw a market capitalization decline of approximately $150bn due to the underwhelming launch of its new artificial intelligence (AI) features for search.

Image Source – Reuters 

The drop in valuation could signal a perception that the company has become complacent, with rival Microsoft recently unveiling a search engine loaded with AI that can answer complex questions using multiple sources of information. Microsoft hopes that being better will result in a more competitive search market, with CEO Satya Nadella warns that gross margins in the sector will drop permanently. The cost of an AI-enhanced search system has been projected to be $10bn.

The importance of margins

Gross margins were 55% for Alphabet last year, generating $157bn. Nadella’s warning, however, indicates that the company’s earnings could be cut in half without significant cost-cutting. As yet, a disruptive and successful launch of AI in search is theoretical, and Alphabet is currently secure, dominating the global search market with over 90% of the market share. Habits die hard and costs to switch are high, meaning incumbents have a considerable advantage.

Perceived threats

However, perceived threats are harder to shake, as Microsoft discovered before the cloud services push that doubled earnings and saw the company’s stock increase by 10 times. Before CEO Nadella took the reins in 2014, Microsoft was perceived to be more interested in squeezing customers than competing with online rivals, resulting in its earnings multiple being cut in half to 10, which persisted for a decade. It was not until the cloud services push that the company’s narrative changed.

The impact on Alphabet

While the lull at Alphabet might not be a cause for concern if it ultimately resulted in the same outcome, it is painful for shareholders. Alphabet’s stock fell over 7% on 8 February and was down over 4% on 9 February, as an underwhelming reveal of its new AI features for search coincided with a Reuters report that an advertisement for its AI-powered bot, Bard, gave an erroneous answer to a question. The machine stated that the James Web Space Telescope took the first picture of an exoplanet, when in fact a European satellite took the first picture 18 years earlier.

Microsoft’s unveiling of AI

In contrast, Microsoft unveiled new versions of its search engine and web browser on 7 February, incorporating AI. It has released a version of Bing using the technology, indicating that the company is seeking a larger share of the search market. The cost of an AI-enhanced search system has been projected to be $10bn, indicating the investment that Microsoft is willing to make to ensure that it remains a serious competitor to Alphabet.

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