Al Root

Disruption is always a fear of technology investors, for good reason. The radio gave way to televisions, landlines to cellphones, and flip phones to smartphones.

Now, chatbots using artificial intelligence are beginning to shake up internet search, a field dominated by Google. According to Melius Research analyst Ben Reitzes, the disruption could make Alphabet stock this generation's Kodak

"Alphabet [is] down 25% from recent highs [and is] still 'cheap' for a reason," wrote Reitzes in a Monday report. "Remember Eastman Kodak."

Most investors would prefer to forget it. Kodak and its film dominated photography until the development of digital cameras. The company filed for bankruptcy protection in 2012 and emerged in 2013.

Its market value today is about $500 million, compared with about $30 billion at the peak in 1997. At the time, annual sales totaled roughly $16 billion, with operating profit approaching $2 billion. Sales in 2024 amounted to $1 billion, with no operating profit.

Google is at risk of losing the status as an almost universally accepted search tool that underpins the verb "Google," Reitzes said. "How many kids say they'll 'Gemini' their research paper?" he asked. "Kids make [ChatGPT] their home screen and just use it to find answers with no noise from annoying ads."

So far, the data don't show a deterioration in Google's search business. Reitzes says that won't materialize until 2026. Alphabet didn't immediately respond to a request for comment.

In a sense, Alphabet is already disrupting itself, moving away from ads to subscription-supported sales of its own AI-based tools. There are more than 100 million Google One subscribers.

And while Gemini isn't a verb yet, New Street Research analyst Dan Salmon pointed out in a recent report that more than one billion global users see Gemini AI summaries every month. That dwarfs the numbers AI start-ups have achieved.

The scenario Kodak might not be on the table, but Reitzes makes one more point that matters. Fear of disruption can hurt stock valuations for a long time.

"Kodak peaked at nearly a 20 times next 12 month PE multiple in 1998 and was sub 7 times next 12 month EPS three years later," wrote Reitzes. "While Alphabet's multiple has already declined about 40% from its peak in 2020, its [roughly] 18 times multiple today (called cheap by most analysts) is roughly the same as it was on the day of ChatGPT's launch in 2022."

As AI chatbot competition heats up, investors might be unable to rely on a rising price/earnings ratio to boost Alphabet shares. Gains will have to come from earnings growth, capital returns, and smart strategic decisions.

Investors will have a chance to evaluate how things are going next week. Google Cloud 2025, Alphabet's developers conference, starts on April 9. Monness Crespi Hardt analyst Brian White is looking for details on AI and Alphabet's recent purchase of the cybersecurity platform Wiz.

White rates Alphabet shares Hold and doesn't have a price target for the stock. Reitzes rates shares Hold, with a target of $173. Salmon rates shares Buy and has a $215 price target for the stock.

The average analyst price target for Alphabet shares is about $217, which values the company at about 24 times estimated 2025 earnings. Its current valuation is closer to 17 times.

Alphabet stock was down 1.1% at $152.68 in late morning, while the S&P 500 and Dow Jones Industrial Average were off 0.9% and 0.2%, respectively.

Through early trading, Alphabet stock was down about 26% from February highs as doubts about the market's AI-fueled rally, plus concern over tariffs, have dragged on shares. Nvidia stock was down 25% over the same span.

Write to Al Root at allen.root@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

March 31, 2025 12:22 ET (16:22 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.