Alphabet's stock has weathered past AI missteps. Is latest blunder different?

By Emily Bary

An analyst calls Alphabet shares 'cheap for a reason' while raising concerns about brand damage

Alphabet is no stranger to Wall Street's concerns over its artificial-intelligence efforts, and its stock has recovered from past episodes. Is the latest backlash to a since-pulled image-generation tool any different?

Wall Street currently appears worried about the fallout of an image-generation feature within the Gemini chatbot that was criticized for sometimes creating racially insensitive images. Even a Google executive acknowledged they were at times "inaccurate or even offensive."

See also: Google to halt Gemini tool from generating images of people after criticism

Shares of Alphabet (GOOG) (GOOGL) fell more than 4% on Monday, drawing flashbacks to stretches last spring when investors panned the company's AI blunders or its perceived relative positioning to Microsoft Corp. (MSFT). While Alphabet shares recovered - and then some - from those episodes, Melius Research analyst Ben Reitzes sees potential problems ahead for the search giant.

"Some of Google's AI launches have seemed hasty, confusingand scattered," he wrote in a Monday report.

While Google paused image generation through the tool, Reitzes wondered if the company hurt its brand with the rollout.

"Regardless of your view, if Google is seen as an unreliable source for AI to a portion of the population, that isn't good for business," he wrote.

Plus, Reitzes worries about Google's search positioning as AI becomes a more prominent way for users to get their queries addressed. "This 'once-in-a-generation' change by itself creates opportunities for competitors, but even more if a meaningful portion of users grow concerned about Google's hallucinations and bias," he wrote.

Other large technology companies, in his view, have more recurring revenue than Alphabet. While the company certainly dominates the search market, "Google only needs little misses in Search (like last quarter) to underperform" peers, Reitzes said.

He has a hold rating on Alphabet's stock, dubbing it "cheap for a reason" in his latest note to clients. Reitzes has an "extensive and frankly un-Google-like wish list for the company," including for executives to simplify their messaging around AI offerings, give more comprehensive forecasts and convey the sense that "their stock is a scoreboard."

For now, he sees Amazon.com Inc. (AMZN), Meta Platforms Inc. (META), Nvidia Corp. (NVDA) and Microsoft (MSFT) as boasting more of the "intangibles," and says "it's just as easy to buy these stocks instead."

-Emily Bary

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02-26-24 1829ET

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