Is Alphabet's (GOOG) Position in Search Affected by Artificial Intelligence?

Lakehouse Capital, a Sydney-based investment manager, released its “Lakehouse Global Growth Fund” annual investor letter. A copy of the letter can be downloaded here. The year was strong for the fund despite volatility, backed by the new US administration. The fund returned 33.4% net of fees and expenses compared to 18.4% for its benchmark. Since its inception in December 2017, the Fund has returned 254.4% compared to 139.9% for its benchmark, the MSCI All Country World Index, Net Total Returns (AUD). In addition, please check the fund’s top five holdings to know its best picks in 2025.

In its second-quarter 2025 investor letter, Lakehouse Global Growth Fund highlighted stocks such as Alphabet Inc. (NASDAQ:GOOG). Alphabet Inc. (NASDAQ:GOOG), the parent company of Google, offers various platforms and services operating through Google Services, Google Cloud, and Other Bets segments. The one-month return of Alphabet Inc. (NASDAQ:GOOG) was 15.76%, and its shares gained 47.84% of their value over the last 52 weeks. On September 26, 2025, Alphabet Inc. (NASDAQ:GOOG) stock closed at $247.18 per share, with a market capitalization of $2.985 trillion.

Lakehouse Global Growth Fund stated the following regarding Alphabet Inc. (NASDAQ:GOOG) in its second quarter 2025 investor letter:

"We’ll wrap things up with Alphabet Inc. (NASDAQ:GOOG) , which in similar fashion to Hemnet, only experienced a marginal share price decline over the year. That said, Alphabet did meaningfully underperform our average portfolio return as concerns that it’s near monopolistic position in Search (which generates the majority of their advertising revenue) could be eroded by new Artificial Intelligence (AI) alternatives like ChatGPT and Perplexity. When it comes to the potential risks AI poses to the dominance of search, our view is a balanced one. No doubt uncertainty has increased but we believe Alphabet remains well positioned through its massive user distribution (9 products with over 1 billion users each) and long-standing investments and leadership in AI (DeepMind and Google Brain).

Alphabet is innovating fast and has already successfully rolled out their own AI powered search function, AI Overviews. To date, engagement has been encouraging with consumers searching more frequently, with more detailed queries and clicking through at higher rates. Management has noted that AI Overviews are monetising at the same rate as regular Search ads and, that as of April, AI Overviews had already reached 1.5 billion monthly users. This is a much larger base than ChatGPT and highlights the inherent distribution advantage Alphabet has by being able to directly integrate AI Overviews into the widely used Google Search engine.

Looking at current fundamentals, business momentum continues to be strong with revenue growing 12% year-over-year (14% constant currency) in the most recent quarter. This was driven by double-digit growth across Search, YouTube advertising, subscription platforms, and Google Cloud. Cost discipline efforts are also improving profitability, and operating margins have expanded steadily to 32.6%, up from 25.6% two years ago. With a relatively undemanding valuation of less than 20x forward earnings, we still believe the risk/reward for Alphabet is attractive. That said, it would be remiss not to acknowledge that the future dominance of Search is less certain today than it was a few years ago as the range of potential outcomes has widened. As such, we rightsized our position on strength earlier this year."

Alphabet Inc. (NASDAQ:GOOG) is in 7th position on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 178 hedge fund portfolios held Alphabet Inc. (NASDAQ:GOOG) at the end of the second quarter which was 164 in the previous quarter. In the second quarter of 2025, Alphabet Inc. (NASDAQ: GOOG) achieved a revenue of $96.4 billion, representing an increase of 14% compared to Q2 2024.While we acknowledge the potential of Alphabet Inc. (NASDAQ:GOOG) as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk. If you're looking for an extremely undervalued AI stock that also stands to benefit significantly from Trump-era tariffs and the onshoring trend, see our free report on the best short-term AI stock.

In another article, we covered Alphabet Inc. (NASDAQ:GOOG) and shared the list of most profitable blue-chip stocks to buy. In addition, please check out our hedge fund investor letters Q2 2025 page for more investor letters from hedge funds and other leading investors.

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Disclosure: None. This article is originally published at Insider Monkey.