By Sam Boughedda
Alphabet (NASDAQ:GOOGL) owned Google's margins could be at risk from ChatGPT, according to Morgan Stanley analysts.
The analysts, who maintained an Overweight rating and $120 per share price target on Alphabet, said that while the firm doesn't see ChatGPT threatening Google Search's position as the starting point for online behavior, ChatGPT's 7x higher cost per query than paid search "speaks to GOOGL's margin risk of higher natural language tool adoption."
"ChatGPT and Large Language Models may pose a long-term threat to GOOGL profitability," wrote the analysts. "In our view, the larger GOOGL risk is that this rapidly rising interest in AI and next-generation online aggregation tools could cause/force GOOGL to push out its own natural language models (like LaMDA) faster...which we see likely leading significantly higher capex requirements and lower forward operating margins. GOOGL's disruption risk is its profitability."
Morgan Stanley estimates ChatGPT's cost per query is $0.02 on average, with the compute intensity of ChatGPT's natural language models that store, recall, analyze, and compile large amounts of text into answers in a natural language format being significant. Meanwhile, their analysis means they estimate that ChatGPT's average cost per query ranges anywhere from $0.004-$0.044.
"Even if natural language queries monetize at the same rate as search (arguably aggressive), if 10% of Google search queries are replaced with AI/natural language by '25 it would reduce our GOOGL GAAP operating margins by ~150bps at the mid-point," the analysts argue.