Wall Street Bulls and Bears Debate: Is Alphabet Inc. Class C (GOOGL.US) Undervalued or Caught in an "Innovator's Dilemma"?

After announcing the financial report, Alphabet Inc. Class C's parent company Alphabet (GOOGL.US) has become one of the most discussed stocks on Wall Street. Previously, the company announced strong second quarter financial results (revenue increased by 14% year-on-year, operating profit increased by 32%), successfully refuting the views of some critics who had predicted its imminent collapse due to the impact of artificial intelligence. However, there are significant differences of opinion regarding the future direction of Alphabet, and investors' views are also divided: some believe it will continue to maintain its dominant position, while others are concerned about regulatory pressures and competitive threats. The debate revolves around several key questions: will artificial intelligence chatbots like ChatGPT and Perplexity erode the profitable search business of Alphabet Inc. Class C? Can Alphabet Inc. Class C successfully commercialize its own AI projects? Will the increasingly strict regulatory scrutiny in the US and EU prompt a structural change in Alphabet's business model? As the company's stock valuation is relatively low compared to other tech giants, investors must weigh whether this is a value investment opportunity or if the company indeed faces survival challenges in the ever-changing digital environment. Overall, investors are wondering if Alphabet is facing an innovator's dilemma. The innovator's dilemma refers to the management phenomenon where excellent companies lose their competitive advantage when faced with groundbreaking changes in the market or technology due to factors like organizational inertia and misalignment of demand. Basic Information Alphabet operates the world's most powerful search engine, Alphabet Inc. Class C. The company's business extends beyond search to include YouTube, Android, Alphabet Inc. Class C Browser, Alphabet Inc. Class C Cloud, and numerous "other ventures" such as Waymo (autonomous driving technology). Alphabet Inc. Class C's search engine processes billions of queries daily and primarily contributes to the company's revenue through advertising. YouTube is the world's second-largest search engine and significantly contributes to Alphabet's advertising revenue. Alphabet Inc. Class C Cloud has emerged as a major competitor in the cloud computing field, with annual recurring revenue reaching $500 billion. Currently, the company's profitability is strong, with an operating profit margin of 32.4%, well above the industry average. Growth indicators are positive, with revenue increasing by 14% year-on-year in the most recent quarter. However, valuation issues have an impact on its overall rating. The company's forward price-to-earnings ratio is 19.5 times, lower than the S&P 500 index average of 22.4 times and lower than the average of nearly 30 times for other tech stocks of the "Big Seven Tech Titans." Alphabet Inc. Class C's stock is currently trading at $192.39, with a year-to-date increase of 1.1% and a 12.5% increase over the past year. The stock has fallen from its 52-week high of $208.70 but remains significantly higher than its 52-week low of $142.66. Following the announcement of the most recent second-quarter financial report, the stock price showed a significant positive reaction, as the company's reported performance exceeded expectations, alleviating some investors' concerns about the impact of artificial intelligence and showcasing the strength of its core advertising business. Competitive Pressure Alphabet faces increasing competition from traditional competitors as well as emerging companies focused on the field of artificial intelligence. In the US, the Department of Justice accuses Alphabet Inc. Class C of holding an illegal monopoly in the advertising market and having a dominant position in the search field. The government is seeking remedies, which may include selling Alphabet Inc. Class C's Chrome browser and ad exchange business. In the EU, Alphabet also faces similar regulatory challenges, including fines of up to 10% of its global turnover for violating the Digital Markets Act. In addition to regulatory pressures, companies like OpenAI and Perplexity are developing AI-based search alternatives that could threaten Alphabet Inc. Class C's core business, and Apple Inc. (AAPL.US) is reportedly considering developing its own search function or acquiring companies like Perplexity in the AI search space. Bull/Bear Debate Bears believe that Alphabet faces survival challenges in multiple areas, and while its current profitability is good, it still carries high investment risks. The most concerning issue is that AI-based alternatives like ChatGPT and Perplexity are replacing traditional search behaviors, which could undermine Alphabet Inc. Class C's core profit engine, accounting for two-thirds of its profits. Furthermore, regulatory pressures in the US and EU may force Alphabet to change its business model, which could include selling key assets such as the Chrome browser and its ad exchange platform. Critics also point out that even Alphabet Inc. Class C's own AI projects face a dilemma: resist AI transformation and lose market share, or accept it and erode its profitable search advertising business. On the other hand, Bulls argue that Alphabet's performance in the second quarter demonstrates resilience rather than vulnerability. Despite facing competition in AI, the company's search business revenue still grew by 12% year-on-year. Supporters point out that AI features like "Search by Image" and "AI Overview" actually enhance rather than diminish search engagement, bringing an additional 4% to 6% in ad impressions. Alphabet Inc. Class C Cloud's remarkable 31% revenue growth and expanding profit margin (reaching 21% in the second quarter) demonstrate the success of Alphabet's diversification strategy and justify its large-scale capital expenditures. Optimists also note that, compared to other tech giants, Alphabet's valuation is relatively low, with a forward price-to-EBITDA ratio of 12 times and a historical average price-to-earnings ratio of 12.7 times over the past 10 years, indicating that the market undervalues its competitive advantage and growth potential. Chartered Financial Analyst (CFA) Jussi Askola gave Alphabet a "sell" rating, stating, "Most investors are currently optimistic about Alphabet/Alphabet Inc. Class C. But they seem to be overlooking a very important risk. Yes, Alphabet Inc. Class C is a leader in the field of artificial intelligence, but it will still erode its most profitable business... I have replaced over 90% of my searches on Alphabet Inc. Class C with AI tools like ChatGPT, and I don't want to use Alphabet Inc. Class C anymore... AI tools like ChatGPT, Claude, Perplexity, and Grok are much more efficient in finding the right information than Alphabet Inc. Class C." The bearish organization Bears of Wall Street gave a "sell" rating and stated, "Alphabet faces significant regulatory pressures that could disrupt its business model. In the US, Alphabet is accused of holding illegal monopolies in the publisher ad server market and the ad exchange platform market. Therefore, the US Department of Justice hopes the company will divest its ad exchange platform and ad server business, which could weaken Alphabet's dominant position in the search industry." Research company JR Research stated, "This company has faced many challenges convincing the market that it will not be disrupted by the rise of artificial intelligence. After all, companies solely in the AI business are striving to break Chrome's monopoly in the market, trying to lead users to use browser supported by agent-based AI, completely changing our perception of the existing search methods." However, after Alphabet announced a strong second-quarter financial report, Goldman Sachs Group, Inc. raised the stock's target price from $225 to $234. Goldman Sachs Group, Inc. believes that Alphabet's accelerated investment in artificial intelligence (AI) will drive long-term growth in its core business. The company stated that Alphabet's latest financial report shows that its search, YouTube, and cloud business segments continue to perform well, but emphasized that the evolving AI strategy of the company will be a major driver of future value. Truist Securities also raised Alphabet's target price from $200 to $225, while maintaining a "buy" rating. The company noted that despite increased AI competition and macroeconomic uncertainty, Alphabet's execution performance remains strong. Additionally, JMP Securities reaffirmed their "outperform the market" rating on Alphabet and maintained a target price of $225. JPMorgan maintained an "overweight" rating on Alphabet and set a target price of $232. The investment bank noted that Alphabet has become one of the "most discussed stocks" in its research coverage, with recent investor discussions focusing on the judicial decisions regarding compensation measures in the pending search business agreement case. Despite legal uncertainties, JPMorgan described the most recent quarterly performance of Alphabet as a "decisive quarter" for the company and further reinforced its bullish stance on the stock.