Since reaching all-time highs on July 9th, Alphabet’s (GOOGL) shares have experienced a correction, driven by uncertainty about its future dominance in search advertising and regulatory pressures related to its perceived monopoly status. While increased competition in search presents a risk to the bullish thesis, I still rate Alphabet as a Buy. Recent search performance has been strong, and the company’s growth in cloud services is just beginning.
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I believe Alphabet is well-positioned to maintain its dominance, though with greater challenges ahead, while Google Cloud continues becoming increasingly important to revenue and profit.
Is Google’s Search Dominance at Risk?
My bullish thesis on Alphabet largely rests on its dominance in search, which holds over 90% of the global market share. Alphabet remains primarily an ad-driven company, but the AI boom has raised concerns about the future of its search business.
Google’s long-term dominance faces significant headwinds from rising competitors like TikTok, Amazon (AMZN), and AI-powered platforms. For example, TikTok’s new search keyword ad feature and AI tools like Perplexity are threatening Google’s ad share in the U.S., which stands at 50.5% and is projected to drop below 50% next year for the first time in over a decade, according to third-party data from eMarketer.
Meanwhile, Amazon’s search ad market share has grown to 22.3% as more consumers start product searches on its platform. By 2025, Amazon is expected to hold just under 25% of U.S. search ad revenue—only half of Google’s share despite its growth. Thus, projections suggest that Google continues to be the leading platform for search ad spending despite the growing interest in generative AI innovations.
How Google’s Search Performance Is Shaping Up
Despite its reliance on the advertising segment for revenue generation, my bullish thesis on Alphabet remains strong. Alphabet’s advertising business, which includes Google Search, YouTube ads, and the Google Network, accounts for about 76% of the company’s total revenue, with Google Search solely contributing 57% of that amount.
Even amid competitive threats, the company has consistently delivered excellent growth results on search. Considering that Google Search generated about $175 billion last year, some investors may overlook that Q2 marked the sixth consecutive quarter of steady growth for Google Search. Notably, the previous four quarters have shown double-digit increases. For instance, in the most recent quarter, Google Search grew by 13.8% from Q2 2023 to Q2 2024, a strong performance that helped offset shortfalls in YouTube revenues.
Google Cloud’s Potential Contribution to Alphabet’s Growth
The favorable outlook for Alphabet extends beyond its search business. The tech giant has greatly benefited from the surge in AI demand by making significant advancements in cloud computing. This diversification positions Alphabet well for future growth.
While Google’s dominance in search may be declining—although recent results suggest a contrary trend—the rapid growth of Google Cloud and its improving margins have been noteworthy. Currently, Google Cloud holds an 11% share of the cloud computing market and is the fastest-growing among the three major players: Amazon’s AWS and Microsoft (MSFT) Azure.
Due to Alphabet’s sustained investments in Google Cloud, the segment operated at a loss until 2022 but is now starting to reap the rewards. In Q2 of this year, Google Cloud’s revenue surged 29% to $10.3 billion, marking the sixth consecutive quarter of growth. However, Alphabet’s Cloud segment reported operating margins of 11.3% last quarter, which, while an improvement, remains significantly lower than AWS’s operating margin of 35.5%. Enhancing these margins is a top priority for Alphabet, and I believe it will soon achieve margins closer to those of its two major competitors.
Is GOOGL A Buy, According to Wall Street Analysts?
At TipRanks, GOOGL is rated as a Strong Buy based on the assessments of 39 Wall Street analysts. Of these analysts, 30 recommend a Buy, while nine suggest a Hold. The average price target for GOOGL stock is $202.11, indicating an upside potential of 20.98% based on the latest share price.
See more GOOGL analyst ratings
Among the skeptics, Wells Fargo analyst Ken Gawrelski, who maintains a Hold position on Alphabet, questions the sustainability of Google’s Search revenues. Despite better-than-expected performance in the first half of the year, he anticipates competitive headwinds from social media platforms disrupting travel advertisement spending, which could impact Alphabet’s earnings in the coming year.
Conversely, Pivotal Research analyst Jeffrey Wlodarczak holds a more optimistic view of Alphabet’s search capabilities. He notes that the company has a strong competitive position with a significant moat, and he believes that its robust AI platform and financial strength will allow it to offer incentives to manufacturers to keep Google as the default AI assistant.
Conclusion
While Alphabet may be facing a trend of losing market share in the search advertising business, its dominant position will likely remain secure for the foreseeable future, particularly as the company continues enhancing its AI capabilities in Search. Recent prolonged double-digit growth results in Google Search, which surprised some market participants, reinforce this outlook.
Moreover, Google Cloud has proven to be a strong growth avenue, securing a solid third position in the cloud computing market. As reinvestments yield results, Google Cloud is expected to contribute increasingly to the company’s top-and-bottom lines, driving robust revenue growth and margin improvement each year.
