Google Just Silenced Its Haters With This 1 Eye-Popping Number

Key Points

• Skeptics thought Alphabet would report disappointing search volumes in the second quarter.

• Chatbot usage is on the rise, and a comment from an Apple executive in May sounded an alarm.

• However, the Google parent surprised everybody with accelerating search volume.

• 10 stocks we like better than Alphabet ›

Of the "Magnificent Seven" stocks, Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) trades at the cheapest valuation by a significant margin, and has been over the past few years.

The main reason is the perception or fear that new artificial intelligence (AI) chatbots such as ChatGPT will disrupt Google Search, leading to a decline in Alphabet's largest and most profitable business.

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Yet on Alphabet's second-quarter earnings release, Chief Business Officer Philipp Schindler revealed a number that should quiet the naysayers. In the wake of this one number's crucial disclosure, look for Alphabet's stock to rerate higher.

4% click growth

While revenue in Alphabet's search and other segment grew a touch under 12% in Q2, increased prices per ad can also buoy those results. Alphabet skeptics, on the other hand, have been scrutinizing paid clicks, which illuminates the volume of search activity. In other words, ad price inflation may be able to keep up revenue growth, but if paid clicks begin to decline, it could be an early sign of search being disrupted.

But on the conference call with analysts, Schindler highlighted a number that should silence the skeptics, as paid clicks grew by 4%.

Data source: Alphabet quarterly and annual filings.

Fortunately, that 4% growth marks an acceleration over Q1, which had seen a 3-point deceleration to just 2%. That big Q1 drop-off was fodder for skeptics who might have thought we were at the tipping point when AI chatbots would take over Google Search.

The fear was augmented in May, when Apple executive Eddie Cue noted in an antitrust deposition that Apple had seen declines in monthly search volume on Apple's Safari browser for the first time in 22 years. Sounds pretty dire, doesn't it?

However, that statement could have been mainly attributed to usage -- or lack thereof -- of Apple's Safari. Meanwhile, a 4% growth reacceleration in Q2 seems to negate the bear thesis, at least for the moment. While it could be an anomalous positive bump, it seems like the first quarter could also very well have been an anomaly. After all, tariff fears broke out in earnest in late February, which could have caused many advertisers and consumers to pull back in the first quarter.

Image source: Getty Images.

Why isn't search volume declining?

It was probably surprising to Alphabet's bears that search volume could actually reaccelerate. After all, it has been reported that ChatGPT users have skyrocketed from 300 million in December to 500 million as of March. And of course, ChatGPT is only one of several chatbots accelerating usage.

And yet, a parallel growth in paid clicks on search is also happening. This could be for a few reasons:

1. Chatbots and search aren't exactly the same thing. I continue to use both chatbots and Google Search when researching a topic. Obviously, chatbots tend to give more information to open-ended questions, whereas search, as the name implies, is still a very good tool when seeking a particular piece of information. And remember, Google doesn't monetize every search. Therefore, it's possible, or even likely, that chatbots may be taking traffic away from some searches at the margins, but not the "monetizable" searches, whereby a customer searches for a specific good or service.
2. 20-year habits are hard to break. Google Search has been a virtual monopoly and daily routine for many, and daily routines may be harder to break than some might think.
3. Alphabet has been enhancing search in the age of chatbots. Last year, Alphabet enhanced search with AI Overviews meant to give an AI-powered summary to most queries. As time went on, management found a way to monetize AI Overviews on par with traditional search. And in May of this year, Google rolled out "AI mode" in search, which uses Google's cutting-edge Gemini LLM to give more in-depth answers, pretty much like a traditional chatbot, but within the Google Search interface.

Combining all three of these elements -- Google infusing chatbot features into search, search remaining a daily habit for billions of people, and traditional search still being useful for commercial queries -- it's perhaps not hard to see why paid clicks managed to grow, even in an age where chatbots are on the rise.

Given that Alphabet has had such a discounted valuation relative to peers over this issue, it wouldn't be surprising to see the stock rerate higher in the near term.

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Billy Duberstein and/or his clients have positions in Alphabet and Apple. The Motley Fool has positions in and recommends Alphabet and Apple. The Motley Fool has a disclosure policy.