Alphabet Slumps as Apple Eyes AI Search—Is the Sell-Off Overdone?

Core Viewpoint - Alphabet's stock has faced significant challenges in 2025, dropping over 20% year-to-date and entering bear market territory due to shifting investor sentiment and increased competition, particularly from Apple's potential AI search initiatives [1][2] Alphabet's Search Business - The announcement from Apple regarding its exploration of AI-powered search alternatives poses a serious threat to Google's search dominance, as Google pays Apple approximately $20 billion annually to remain the default search engine on Safari, which constitutes about 36% of Google's mobile search ad revenue [2][3] - A loss of exclusivity in Safari would adversely impact Alphabet's advertising business, which accounted for over half of its total revenue in 2024 [3] AI and Competitive Response - In response to competitive pressures, Alphabet has prioritized AI, launching its flagship large language model, Gemini, and integrating AI Overviews into Google Search, which currently serves over 1.5 billion users across 140 countries [6][7] - Despite the competitive landscape, Alphabet's monetization remains strong, with AI Overviews generating revenue comparable to traditional search results [7] Revenue Diversification - Alphabet is diversifying its revenue streams, with YouTube ad revenue reaching $10.47 billion last quarter, bolstered by increased subscriptions and user engagement [8] - Google Cloud is gaining traction as enterprise clients adopt AI-powered solutions, and Waymo is expanding its operations in over 10 U.S. cities, positioning itself in the autonomous vehicle market [8] Regulatory Challenges - Alphabet faces ongoing regulatory scrutiny, with a federal judge ruling that Google operates an illegal monopoly in the online search market, adding uncertainty to its long-term dominance [9] Financial Performance and Valuation - Alphabet's financial performance remains robust, with a 14% revenue growth in 2024 and earnings per share (EPS) of $8.04, alongside a strong free cash flow and a cash reserve of $96 billion [10] - The stock's forward P/E ratio has decreased to 14.9, significantly below its historical average of 28, indicating a potential undervaluation despite near-term challenges [11]