Google Stock (NASDAQ:GOOGL)

Investors are mostly thinking about Google (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT) when it comes to the battle for generative artificial intelligence. This is because both tech giants are making changes to search and using chatbots in their own products.

Even though Google has a lot of users and a big market share, analyst Brian Nowak of Morgan Stanley says that a deeper integration of AI than expected could cost the company a lot in the short term.

Nowak gave Google stock an “overweight” rating and a price target of $135 per share. He said that if 10% of searches were moved to language models, it could add as much as $1.2 billion to the company’s operating costs, which are led by Sundar Pichai.

This week, Microsoft said it gets about 10 billion search queries per day. Nowak said that means Google gets about 3.3 trillion per day, which gives Microsoft about 3% of the market.

Even though 3.3T queries are much less than what was thought, it still means that Google spends about one-fifth of a cent on each search query. Nowak thinks that natural language queries could cost five times as much as traditional queries because natural language models require a lot of computing power.

Nowak went so far as to say that if natural language integration ended up being used in half of Google’s searches, it could add up to $6 billion to the company’s costs and cut its earnings before interest and taxes by up to 6%.

So, Nowak says there are four things to keep an eye on, such as how fast Google rolls out new tools for consumers and how good those tools are.

Nowak said that monthly trackers that compare ChatGPT, Bing, and Google show “no material signs” that Google is getting worse. Nowak says that this “speaks to the likely high incrementality of these [natural language] search queries” and that the quality, accuracy, and trustworthiness of the results will be important to get “consistent” traction.

That could be a problem for Google in the near future since Bard was wrong in a recent company ad when it said the James Webb Telescope took the first pictures of exoplanets, which are planets outside of our solar system.

The first exoplanet was found in 1992, and since then, more than 5,000 have been found. On December 25, 2021, the James Webb Telescope will be sent into space.

Even though Google made a mistake early on, Nowak said that the company’s size and faster feedback loops are likely to be “positive” for it.

Given how new generative AI is, another important thing to keep an eye on is how developers use it. There’s a good chance that more AI tools will be used in next-generation products, but it’s still early for them, and with all the talk about ChatGPT, it’s possible that the developer community will move in fits and starts.

Nowak also said that AI could make it possible for more shopping transactions to happen in fewer steps. A change like this could lead to transactions happening on Google, giving the tech giant “additional revenue” while cutting out third parties like small e-commerce companies, local companies like Yelp (NYSE:YELP), and online travel agencies.

This week, Google showed off a new feature in Google Lens called “multi-search.” This feature lets people look for items using both text and images, which is useful for shopping. Google said that the feature, which was already available to mobile users in the U.S. and India, is now available to mobile users everywhere.

Lastly, Google is likely to switch a portion (perhaps a large portion) of its search queries to natural language models. This means that the company’s cost efficiencies are “more important” than ever, especially since any search changes are unlikely to pay off until at least 2024, putting the company’s free cash flow in question.

Google stock has risen 6% year-to-date.

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