On Wednesday, May 7th, 2025, Alphabet’s stock experienced a significant 7.5% drop following a Bloomberg report revealing Apple services head Eddy Cue’s view that AI-powered search engines would eventually replace traditional ones like Google. This market reaction highlights investor concerns about potential disruption to Google’s core business model.
Why It Matters?
Why is this important? Search remains Google’s dominant revenue source, accounting for 57% of total revenues last year. The company’s other income streams include Google Cloud (12%), YouTube ads (10%), network properties (9%), and a combination of other revenues and bets (12%). For more comprehensive details about Google’s revenue structure, you can refer to our dashboard on “How Google Makes Money.” Investors seem to be worried that this heavy reliance on search advertising creates a significant vulnerability if AI search alternatives gain traction.
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Global Economic Context: The U.S.-China Tariff Pause
Adding to the complex market environment, the U.S. and China recently agreed to a 90-day pause on tariffs, representing a significant de-escalation in trade tensions. Tariffs will decrease by over 115 percentage points on both sides, with China’s tariffs on U.S. goods dropping to 10% from 125%. Similarly, the U.S. “reciprocal” duties on Chinese imports will fall to 10%, though China still faces a separate 20% tariff related to fentanyl.
This trade development could potentially benefit tech companies like Google by reducing supply chain costs and opening access to important component markets, partially offsetting concerns about AI disruption. However, the temporary nature of this agreement means long-term trade uncertainty persists.
Are The AI Concerns Overblown?
It seems so. Despite legitimate concerns, Google possesses substantial strategic advantages that will likely enable it to maintain search dominance through the AI revolution. The company’s vast historical search data, sophisticated algorithms, and global infrastructure provide a strong foundation that competitors will struggle to replicate. Search functionality is deeply embedded across Google’s ecosystem of popular platforms including Chrome, Android, YouTube, and Maps, creating powerful network effects that reinforce its position.
Google is pursuing a comprehensive approach to evolve its search capabilities by enhancing its core search with AI features like AI Overviews while simultaneously developing entirely new AI-native search experiences. The company continues investing heavily in advanced language models like Gemini to power next-generation search capabilities that extend beyond text to include images, audio, and video.
As this transformation unfolds, several factors will determine Google’s success. The company must ensure factuality in AI-generated results to maintain user trust. Google will need to adapt its ad-based business model to new AI-powered search interfaces while navigating increasing regulatory scrutiny around AI deployment and data usage.
Now, the transition from traditional to AI-powered search represents a fundamental shift in how information is discovered and accessed. However, this transformation will likely occur gradually rather than abruptly. Users and businesses will need time to adapt to new search paradigms, and advertising models will evolve progressively to accommodate AI interfaces.
What About Risks?
Of course, there are risks. For instance, Apple’s recent emphasis on AI integration isn’t just another routine tech announcement; it suggests a fundamental change in how users could access information. By deeply embedding Siri and ChatGPT-like AI capabilities directly within iOS, Apple is forging a direct route for users to obtain information, potentially circumventing Google altogether. Concurrent advancements in platforms like ChatGPT, Perplexity AI, and Microsoft’s Bing Copilot are also establishing alternative pathways for information discovery.
The most immediate and concerning consequence for Google is the potential for a decline in search referral traffic originating from iPhones. This impact could realistically begin to materialize within the next 12 to 24 months. Our take on this – Google’s $1 Trillion Problem: Stock To Crash 40%? – has more details.
Stock Performance Context
Alphabet’s stock is down approximately 20% year-to-date, underperforming the broader NASDAQ index (down 8%). This performance gap reflects investor concerns about AI disruption risk, regulatory pressures, increasing competition, and uncertainty around monetization in AI-powered interfaces.
However, we estimate Google’s Valuation to be $205 per share, reflecting over 30% upside. At its current levels of $155, GOOG stock is trading at just 17x trailing earnings of $8.97 per share, much lower than the stock’s average price-to-earnings ratio of 25x over the last five years.
Takeaway
While the recent comments from Eddy Cue represent a significant threat to Google’s core business model, the company’s substantial advantages in data, algorithms, and infrastructure position it well to navigate this transition. Google is actively evolving its search capabilities while addressing critical challenges around factuality, monetization, and user trust. For investors, monitoring Google’s progress in AI search implementation and key metrics like search market share and ad revenue will be essential for evaluating the company’s long-term competitive position in this rapidly evolving landscape.
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