Alphabet Slumps as Apple Eyes AI Search—Is the Sell-Off Overdone?

Key Points

• Apple’s plan to integrate AI-powered search into Safari could end its $20 billion partnership with Google, threatening Alphabet's major revenue stream.
• Alphabet is fighting back with its Gemini AI model and AI Overviews, which serve over 1.5 billion users globally and maintain strong monetization.
• Despite risks, Alphabet’s fundamentals remain solid, and its forward P/E of 14.9 presents a potentially attractive buying opportunity for long-term investors.

Shares of Alphabet NASDAQ: GOOGL, Google's parent company, have struggled in 2025, falling over 20% year-to-date and officially entering bear market territory. The tech giant has come under pressure amid shifting investor sentiment and intensifying competition. The latest blow came on May 7, when Apple’s senior vice president of services, Eddy Cue, announced the company is actively exploring AI-powered search engine alternatives for Safari, potentially ending its lucrative partnership with Google.

Shares of Alphabet dropped more than 7% following the news, wiping out several weeks of gains.

This raised a key question: Is Google’s search dominance at risk of unraveling, or is the sell-off creating a buying opportunity?

Apple’s AI Search Ambitions Pose Real Threats to Google’s Core Business

The potential shake-up in Apple’s browser strategy is no small matter for Alphabet. Google pays Apple an estimated $20 billion annually to remain the default search engine on Safari, accounting for roughly 36% of Google’s mobile search ad revenue.

Losing that exclusivity would hit Alphabet where it hurts: its advertising business, which brought in over half of its total revenue in 2024.

Cue also noted that Safari search activity declined in April, attributing the dip to users exploring AI-driven alternatives like Perplexity, Anthropic, and OpenAI’s ChatGPT. Many of these tools are being integrated into Apple’s forthcoming “Apple Intelligence” platform, increasing the likelihood that Safari will soon prioritize one of them, or even Apple’s in-house AI search product, over Google.

Google Isn’t Standing Still in the AI Race

While the headlines have been harsh, Alphabet isn’t idly watching its dominance disappear. The company has made AI a core strategic focus and responded quickly with Gemini, its flagship large language model, and AI Overviews, which are now integrated into Google Search.

During its earnings call last month, Alphabet executives said that AI Overviews serve over 1.5 billion users across 140 countries and are monetized at rates comparable to traditional search results. This signals that while user behavior is shifting, Google’s monetization engine remains strong.

Beyond search, Alphabet continues to diversify its revenue streams. YouTube ad revenue hit $10.47 billion last quarter, supported by growing subscriptions and user engagement. Google Cloud is also gaining momentum, with enterprise clients embracing AI-powered solutions. Meanwhile, Waymo, Alphabet’s self-driving unit, is expanding operations across more than 10 U.S. cities, positioning itself as a long-term player in the autonomous vehicle space.

Still, the primary concern for investors is regulatory pressure. A federal judge ruled last August that Google operates an illegal monopoly in the online search market, an ongoing case. Cue’s recent comments were part of testimony in proceedings to determine remedies for that monopoly. While regulatory scrutiny is nothing new for Big Tech, it does add uncertainty around Alphabet’s ability to maintain its dominance in the long term.

Alphabet Has Strong Fundamentals and a Compelling Valuation

Despite the headline risks, Alphabet’s financial performance remains resilient. In 2024, the company posted 14% revenue growth and earnings per share (EPS) of $8.04. Fourth-quarter results slightly exceeded expectations, with EPS of $2.15 and revenue of $96.47 billion. Free cash flow remains robust, and Alphabet’s massive $96 billion cash hoard allows it to navigate short-term turbulence while continuing to invest in innovation.

Perhaps most compelling is Alphabet’s valuation. Historically, the stock has traded at a P/E ratio of 28. Today, its forward P/E has dropped to just 14.9, levels typically reserved for more mature, slow-growth companies. While regulatory headwinds and Apple’s AI ambitions may weigh on near-term sentiment, Alphabet's core businesses remain strong for now, and its stock is trading at a steep discount to historical norms.