Externally, AI agents are competing for traffic gateways; internally, AI modes are eroding search monetization! Alphabet (GOOGL.US) forward P/E ratio has fallen to 18xis it time to bottom-fish?

Notice that since the AI boom began, investors have been worried about whether Alphabet Inc. Class C's dominance in internet search can hold up in an AI world. Last week, parent company Alphabet's (GOOGL.US) earnings report showed search revenue below expectations, indicating these concerns are not unfounded. Ironically, at least part of the threat comes from within, as Alphabet Inc. Class C's expanding AI presence is eroding one of its own advantages. "If the goose that lays the golden eggs is no longer the goose that lays the golden eggs, then there is reason for concern," said Stash Graham, chief investment officer at Graham Capital Wealth Management, which holds Alphabet shares. On Wednesday, Alphabet shares rose amid post-election optimism that lifted most large technology stocks. But that could not mask the historic selloff after the company reported earnings last week. Not only did search revenue miss expectations, but the company also said the popularity of its search "AI Mode" was one reason, and that mode has a lower monetization rate than traditional search. Search weakness may be the latest alarm for investors. Search accounts for more than half of Alphabet's 2025 revenue, and investors had already been hit by its surging capital expenditures, concerns that it is lagging in cutting-edge AI models, and negative free cash flow last quarter. This marks a shift from its image as a historically reliable free cash flow machine. Alphabet shares have struggled this year, turning lower after a 65% surge in 2025. The selloff has accelerated since spring, with the stock down 19% in the second half, making it the second-largest drag on the S&P 500 over that period. In October alone it fell nearly 19%, its worst monthly performance on record, wiping out US$758 billion in market value. Alphabet's 2026 performance is lackluster On the other hand, the decline has also made the stock relatively cheap. It currently trades at about 18x forward 12-month earnings, below 29x in February and below the 10-year average of about 21x. Graham said the shift toward high capital expenditures and negative cash flow provides justification for the low valuation. However, he was surprised by the slowdown in search growth, which makes the stock harder to value. "If search weakness is temporary (which I think it is), then the current valuation multiple is reasonable. But if there is lasting deterioration, then it should fall further," he said. Given that Alphabet Inc. Class C is almost synonymous with internet search, the importance of this business to Alphabet shareholders cannot be overstated. The stock also experienced search-related selloffs in 2023, 2024 and 2025. But this time the concerns seem sharper, especially as Meta Platforms' (META.US) Muse AI agent product creates a huge stir. Citizens analyst Andrew Boone downgraded Alphabet to "market perform" from "outperform" in an October 29 report, writing: "As competition from agents intensifies, we believe agents are the future gateway to the internet (replacing the browser or search), and Alphabet Inc. Class C faces significant execution risk in the transition of search monetization." Dan Ives, a well-known bull analyst at Yorkville Ives, wrote in an October 30 report: "This is the first quarter in which the bear case that 'AI crushes search' holds up." Over the past week, analysts have cut Alphabet's 2026 earnings per share estimate by 4.5%. Beyond the search issue, Wall Street is also worried about the company's massive investment in building AI infrastructure and when those investments will generate meaningful returns. That said, bulls can still take comfort from the acceleration in Alphabet's cloud business and the stock's relatively low valuation. Ed O'Gorman, chief executive of River Wealth Advisors, which holds Alphabet shares, said: "The halo has faded, but the stock price is gradually looking cheap." He said: "There are indeed still questions about what the eventual revenue model for agentic search will look like, but Alphabet has other revenue streams growing quite well, with cloud being the number one example. When there is such a violent knee-jerk selloff, there may be an opportunity to step in. I think the selloff may be somewhat overdone, because how things evolve is still at a very early stage." After the midterm elections, the market value of tech giants increased by more than US$800 billion