Citizens cuts Alphabet rating as search monetization trails query growth

Investing.com -- Citizens downgraded Alphabet to Market Perform from Market Outperform in a note Thursday, citing renewed headwinds in its search business.

Google shares are down around 12% at the open on Thursday following the company’s third-quarter results.

Analyst Andrew Boone said search growth slowed by about 5 points from the second quarter to the third, even as query growth hit a five-year high. Search revenue of $63.3 billion grew 12% year over year and came in 2.5% below the $65 billion consensus.

Alphabet attributed the slowdown mainly to currency effects, along with weaker Asia-Pacific retail spending in the EU and slower media and entertainment spending.

However, Boone said the more concerning factor is that AI Mode monetizes at a lower rate than traditional search.

“With greater competition from agents, which we view as the future gateway to the internet (replacing the browser or search), Google has significant execution risk ahead as it transitions search monetization,” he wrote.

Boone’s thesis is that more knowledge workers are diverting monetizable searches to AI chatbots, which could explain Alphabet’s global query acceleration alongside weaker monetization.

Cloud growth accelerated for a sixth straight quarter to 103%. However, Citizens views search as the more valuable business, given Cloud’s compute intensity and the non-recurring nature of TPU sales.

“While we remain positive on Cloud, search is the better business and drives Google’s premium multiple; therefore, we believe the risk/reward is balanced at current levels,” the analyst said.

Boone acknowledged that Alphabet has the assets to win in AI, and he noted that potential cost cuts could boost EPS.

Original Article

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