Why was Alphabet's stock just downgraded? An analyst sees six risks for Google.

By Emily Bary

One Rosenblatt analyst recommends that investors take a pause on Alphabet shares given changes around AI and the broader ad market

Over the past year and a half, analysts have debated Alphabet Inc.'s future in a world where artificial intelligence becomes more dominant.

So far, Alphabet's stock (GOOG) (GOOGL) has dodged concerns that the core Google search business faces revenue risk if people have their queries answered by AI assistants - including Google's own - rather than asking a traditional search engine and clicking on external links. Alphabet shares have more than doubled since the start of 2023.

But Rosenblatt Securities analyst Barton Crockett thinks investors should now take a pause. Citing "multiple areas of transitional risk," he downgraded Alphabet shares to hold from buy on Friday and recommended "stepping back for a little while to see how the company handles" various changes in the market.

Shares of the Google parent company are down fractionally in Friday's premarket trading.

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Crockett flagged that Google has been pushing its AI Overviews, which give conversational answers to questions that users type into its search product. "The obvious risk is that, at launch, ad volume in AI Overviews is limited, while click driven search revenue in some instances is lessened, as links lose prominence," he wrote, though the company has room to ramp the ad load in time.

While users seem to like AI Overviews, Crockett said the new format "presents a transitional risk of ad slowdown near-term, akin to what Meta went through with Reels."

He also pointed to "nascent evidence of search share loss to Bing," which is the rival search engine from Microsoft Corp. (MSFT)

Crockett has some concerns about the future of search-ad revenue for non-AI reasons as well. For instance, he noted the rise of "retail media," with e-commerce powerhouses Amazon.com Inc. (AMZN) and Walmart Inc. (WMT) both sporting sharp recent growth in advertising revenue.

Another ad risk stems from Amazon's "aggressive entry" into video advertising, as the default Prime Video offering now comes with commercials. This could have repercussions for Alphabet's YouTube business, according to Crockett.

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He noted that Alphabet's search business is up against tougher comparisons in the second half of the year. "We see risk investors worryabout competitive dynamics driving that even if a 2H24 search slowdown is largely comp driven," Crockett said.

Finally, he mentioned that Alphabet could wind up in a "higher-than-anticipated [capital-expenditure] spending cycle for AI" as companies feel competitive pressure to ensure they're well positioned on the technology.

-Emily Bary

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06-28-24 0925ET

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