Alphabet’s stock catches a rare downgrade, with analyst citing AI threat to Google

“We think concern over whether the company can maintain its dominant position through this massive technology transformation will hold back valuation,” he wrote. “We consider search competition from Microsoft a lesser threat than risk of displacement from behavioral change as users interact more with AI assistants to find information.”

Sanderson envisions a future in which social-media companies play a greater role in delivering information to users through AI assistants.

“They have so much more opportunity to engage with users and massive amounts of behavioral and personal data contained only in their networks,” he wrote. “We do not see this as an existential threat to Google, but this behavior will become a competitive force against its dominance in connecting users to information.”

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Alphabet’s valuation could be “volatile” as investors wait to see how the AI transition shapes up, in Sanderson’s view.

Read: Google developers conference is all about AI

More positively, he said that advertising spending has been more resilient than he expected, although he prefers shares of Amazon.com Inc.
AMZN,
+0.63%
and Meta Platforms Inc.
META,
+1.44%
in the large-cap tech space. Sanderson upgraded Meta’s stock to buy from hold Monday, writing of underappreciated revenue potential.

See more: Meta’s ‘outstanding’ stock rally can keep roaring, analyst says in upgrade

He also thinks that Alphabet will do a “better job” of cutting expenses than Wall Street anticipates, given that the company has “a more meaningful opportunity to reduce costs,” especially when looking at its per-employee costs relative to peers Apple Inc.
AAPL,
-0.02%
and Microsoft Corp.
MSFT,
+0.09%.

Shares of Alphabet were off about 1% in Monday’s premarket trading. They’ve rallied 33% so far this year, as the S&P 500
SPX,
-0.04%
has gained roughly 7%.