After decades of nearly unfettered dominance, Google search is facing growing competition from Microsoft ‘s (MSFT) new artificial intelligence-powered Bing — an increasingly real threat that has caused us to reevaluate our position in parent company Alphabet (GOOGL). Alphabet stock tumbled nearly 2.7% Monday, to close just under $106 per share, after The New York Times reported that Samsung Electronics (SSNLF) is considering replacing Google with Bing as the default search engine on its devices. This latest piece of potentially bad news for Alphabet prompted us to downgrade the stock to a 2 from our buy-it-here 1 rating, which means we would want to wait for a more significant pullback before considering purchasing any more shares. We would have also sold some shares if not restricted, given Alphabet’s outperformance this year. Microsoft, also a Club stock, rose nearly 1%, to close at nearly $289 per share. We also have a 2 rating on Microsoft. Both stocks are up more than 20% year to date. Over the past five years, Microsoft’s share price tripled, while Alphabet’s doubled. GOOGL MSFT 5Y mountain Alphabet vs. Microsoft over 5 years The idea that Bing could displace Google on Samsung’s devices alarmed Google executives, according to the Times, not to mention Samsung is a major device maker using Google’s Android mobile operating system. In response, the report noted that Google is working on an entirely new search platform driven by AI, while also updating its current offering with AI features set for release next month. Alphabet pays a hefty price tag every year to be the default search engine for phone manufacturers. That includes an estimated $20 billion annual payment to iPhone maker Apple (AAPL) and about $3 billion to Samsung. This access, however, allows Google to stay ahead of competition like Microsoft, while generating heaps of search traffic that Alphabet then monetizes with advertising. That’s where a majority of its revenue comes from. Google currently has more than 90% market share in search while Bing holds about 3%, according to StatCounter , a lopsided dynamic that’s been in place for years. While Google remains the clear winner, there’s ample opportunity for Bing to incrementally gain market share over time. Even a slim increase could be worth billions of dollars for Microsoft. Alphabet vs. Microsoft Since Bing was first introduced in 2009, Microsoft has been trying to dethrone Google in search. The new Bing — which includes a chatbot powered by Microsoft-backed OpenAI’s latest large language model, Chat GPT-4 — seems to have the best shot in years to make inroads. About a month after unveiling the new Bing, Microsoft said in a blog post that the search engine topped 100 million daily active users (DAUs). By comparison, Google search gets more than 1 billion DAUs. “That said, it feels good to be at the dance,” Microsoft said. ChatGPT became the fastest-growing application when it attracted 100 million users just a couple of months after its launch in November. Microsoft’s partnership with OpenAI allows it to explore new AI capabilities to further advance its products. Alphabet has spent years developing AI. But after Microsoft beat it to the punch with the new Bing, the market perception is that Google has fallen behind in the AI race. That’s why Alphabet rushed to release its new conversational AI service called Bard earlier this year. In a research note, analysts at Morgan Stanley said that since late March, Google’s web traffic through Bard has not “inflected materially, which contrasts with ChatGPT’s steady rise in traffic.” As a result, they lowered Alphabet’s revenue forecast by 2%, citing an uncertain macroeconomic environment and lower results from its search business. Morgan Stanley said Alphabet’s full integration of Bard into search is an important next step to showcase the company’s “leading multiyear AI search and development.” They noted that its AI and machine-learning products are tools that can reinforce the company’s leading position in the online ecosystem. The Club’s take Google has been and still is the long-time leader in search among consumers and corporate partners. But the Times report on Samsung is another example that Microsoft poses a threat to Alphabet as it accelerates plans in artificial intelligence. We own both mega-cap tech names for distinct reasons. Microsoft is making strides in AI and has a solid cloud business in Azure. Alphabet has been a core position in the portfolio for a long time because of its industry-leading advertising platform. In recent years, Alphabet has also made big strides in building out its cloud computing business. However, the main issue the Times story raises is that Google isn’t the only option for search. Even if Samsung is not serious about switching, the mere fact that it was considered raises uncertainty around Alphabet’s AI leadership and how much investment is required into further developing AI to make its search engine more competitive. Still, we’re holding on to GOOGL, in part, because it has a much cheaper valuation than MSFT. Moreover, Microsoft might have accelerated AI capabilities through its partnership with OpenAI, but it hasn’t proven its ability to pull in ad dollars like Alphabet. We don’t view this as an either-or decision: It pays to own both stocks right now. (Jim Cramer’s Charitable Trust is long GOOGL, MSFT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Google headquarters in Mountain View, California, US, on Monday, Jan. 30, 2023. Alphabet Inc. is expected to release earnings figures on February 2.
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