UBS analysts have downgraded Alphabet Inc (NASDAQ:GOOG) shares to ‘Neutral’ from ‘Buy’, but have increased their target price on the stock to $132 per share from $123, on “limited upside and near-term monetization risk”.
They also see medium-term revenue risk from new search (SGE) displacing ad inventory with generative artificial intelligence (GenAI) responses, which may take time to optimize, and operating margin expansion from efficiency efforts that could be offset by a GenAI-driven investment cycle.
“We do not see Bing or ChatGPT as major threats given a superior product at Google,” the analysts wrote, while also noting the more speculative view of some tail risk that Meta's AI chat could gain traction given the scale of users across its apps.
They added that original concerns around the cost of GenAI have moderated, although near-term risk remains and the company did increase capex guidance last quarter and flagged a mix skew towards (faster depreciating) technical infrastructure.
“Time looks like it’s on Google’s side with slowing traffic growth at ChatGPT and limited traction at Bing, which in turn may let Google throttle its roll-out until it fine tunes monetization,” they stated.
Analysts at UBS also noted that more offensive aspects of GenAI could offset risks, namely ad tech improvements and higher engagement.
Nevertheless, they see better risk/reward skew in Buy-rated Amazon.com, Inc and Meta Platforms Inc (NASDAQ:FB) in their coverage universe.
Contact Sean at sean@proactiveinvestors.com