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While Alphabet has had a strong 2023, Loop Capital thinks the proliferation of artificial intelligence could hinder the stock going forward. Loop downgraded Alphabet to hold from buy. The firm reiterated its $125 per share price target, which is 6.4% above Friday’s close. Shares dipped 0.7% in the premarket. “We think concern over whether the company can maintain its dominant position through this massive technology transformation will hold back valuation. 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,” analyst Rob Sanderson wrote in a Monday client note. Sanderson added that he disagrees with Google management’s characterization of the transition to generative AI during the company’s annual developer conference earlier in May. “We are comfortable with Google’s ability to again win on product and maintain a reasonably similar share of search activity. We disagree however with management’s characterization that AI proliferation is similar [to] the transition to mobile. This is much more than a platform transition,” said Sanderson. The analyst thinks Alphabet may have “a more meaningful opportunity” to lower costs, similar to Meta’s significant cost reduction measures, albeit on a lower scale. “We expect a better job of expense reduction,” Sanderson said. “When compared to the massive re-set by Internet peer Meta, Google does not appear to have as much room. However when compared to older tech incumbents Microsoft and Apple, Google still has meaningfully higher expenses per employee.” Loop found that following Meta, Alphabet has the highest total GAAP expenses per employee among the big four tech names including Microsoft and Apple. Although Alphabet shares have surged more than 33% in 2023, the stock has gained just 1.2% over the last 12 months, underperforming the S & P 500. “We think long-term structural uncertainties surrounding the AI transition will keep investors nervous as the landscape evolves and put a ceiling on valuation,” said the analyst. —CNBC’s Michael Bloom contributed to this report.
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