There has been endless hype around artificial intelligence (AI) in 2023. The pair of companies most guilty of invoking this hype are Microsoft and its start-up partner OpenAI, which have released various human-like chatbot tools for people to use. Microsoft wants to increase market share for its Bing search engine, with CEO Satya Nadella famously saying he wants Alphabet (GOOG -1.84%) (GOOGL -1.76%) "to know that we made them dance" when it comes to these new AI search tools.
Wall Street originally took this negatively for Alphabet, sending shares lower in February and March of this year. However, in recent months, Alphabet stock has soared as the company retained its search market share and posted a strong earnings report.
Here's why Microsoft's AI bets haven't hurt Google, and whether these new AI tools will ever threaten Google's lead in the search market.
Google's dominance is more than just a good product
Google has an estimated 90%-plus market share globally across all computing devices when it comes to search queries. Even on desktop computers -- where Microsoft is the leading operating system -- Google has an estimated worldwide market share of 85%.
Originally, Google achieved this dominance due to a better product than legacy search companies such as Yahoo!. However, since 2010, one could make the argument that the quality of Google's search results is less relevant in keeping people using the product compared to its licensing deals and all the other (mostly free) products it has layered on top of the search engine.
Alphabet pays Apple a huge sum every year to make Google the default search engine on its Safari web browser, which gives Google a dominant market share on Apple devices like the iPhone. Alphabet offers products like Google Chrome, Gmail, Google Drive, and Google Maps for free, which all default or easily connect to the Google search engine. There is also the Android mobile operating system Alphabet owns, which powers virtually every smartphone in the world that isn't made by Apple and comes preloaded with every Alphabet product.
Alphabet makes money from some of these services on a stand-alone basis, but they are most valuable to the company as a way to keep people locked into the Google search engine. Search still drives the majority of Alphabet's business, bringing in 58% of the company's revenue in the first quarter and an even higher portion of its profits.
Coming back to AI, it doesn't matter if Microsoft can make the Bing search engine slightly better than Google. Customers will likely stick with Google due to all the other free services they use along with it. So far, this is showing up in the data, with Google's market share staying flat for desktop users over the past 12 months (the only place where Microsoft has an opportunity to gain market share).
Should investors still be worried?
The growth of AI should not strike fear into Alphabet investors. The company has released its own lifelike AI tools to the public in order to compete with OpenAI and Microsoft, and it has a huge advantage with all the other services it gives to users for free. Unless Microsoft can copy and is willing to make free Google Maps, Gmail, Google Drive, and Google Pay, it is hard to see why someone would start using Bing over Google.
In fact, Alphabet will likely benefit from the AI boom over the long run. Why? Because of all the start-ups, enterprises, and researchers building their own AI products on Google Cloud. The cloud infrastructure provider allows companies to utilize Google's leading AI tools without buying their own servers -- for a fee, of course.
Last quarter, Google Cloud's revenue hit $7.45 billion and was growing 28% year over year. If this AI boom continues, Google Cloud will likely see strong growth in the years ahead.
Alphabet shares still look cheap
After its recent rebound, shares of Alphabet are now up 33% this year and sport a market cap of $1.5 trillion. That gives the stock a price-to-earnings ratio (P/E) of 26.8.
GOOG PE Ratio data by YCharts
Some value investors may scoff at this earnings multiple and say that Alphabet shares are expensive. However, the company has multiple drivers to continue growing earnings.
First, Google Search still has a long runway to grow, as the vast majority of the world will start using the internet this decade. Second, it has other business lines like Google Cloud and YouTube growing even faster than Google Search. And let's not forget its Other Bets division, which houses projects like the self-driving start-up Waymo.
Put all the pieces together, and Alphabet stock looks like something investors can buy and hold for many years of gains.
