Alphabet’s (NASDAQ:GOOGL) AI image generator, Gemini, has recently stirred controversy with its output featuring racially diverse Nazis, a woman pope, and black founding fathers. Whether one finds these creations stupidly hilarious or insulting, they undoubtedly mark a significant setback for Google’s Gen AI endeavors. Meanwhile, Google has halted the usage of the tool as it works to address these issues.
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This adds to Alphabet’s bumpy ride this year, with its shares down by 6% while the S&P 500 is up by 7%.
As embarrassing as the Gemini issues have been, J.P. Morgan analyst Doug Anmuth thinks there are other reasons why sentiment is depressed.
“Investor frustration has boiled over around the recent Gemini issues, but we believe there is also a manifestation of uncertainty around the growth & positioning of search in a Gen AI world going forward, lack of clear goals & targets in re-engineering the cost structure, calls for bigger capital returns (including a dividend), and simply tough comparisons to Meta, which seems to be doing everything right,” the analyst explained. “Closing arguments in the DOJ trial over commercial agreements with Apple & Android OEMs are also just 2 months out, further complicating the investment case.”
That said, Anmuth makes the case that it would be wrong to write off the tech giant. The analyst believes the company’s Q4 results were solid, but had to contend with Meta’s excellent showing, and while the Gemini text & image generation issues have sown doubts among investors in Google’s ability to keep abreast of developments in the tech it actually pioneered, the analyst remains confident that Google will be able to “get Gemini back on track and begin to close the Gen AI gap with Microsoft and OpenAI.”
Moreover, the company will eventually reap further benefits from the ongoing “re-engineering of the cost structure.” Anmuth also thinks capital returns will get a makeover, expecting an improvement on the $70 billion buyback program in each of the past 2 years while a dividend might be introduced. “We believe a dividend could expand the potential pool of investors, but our conversations suggest it would have to be sizable (2%+ yield?) to really matter, and it would have to come in conjunction w/other improvements across Google’s business to make a real difference,” the analyst summed up.
Bottom-line, Anmuth rates GOOGL an Overweight (i.e., Buy), to go along with a $165 price target, suggesting the shares will climb ~26% over the one-year timeframe. (To watch Anmuth’s track record, click here)
28 analysts join Anmuth in the GOOGL bull camp and while 8 currently remain on the fence, the stock still claims a Strong Buy consensus rating. The average target is almost the same as Anmuth’s objective; at $164.59, the figure makes room for 12-month returns of ~25%. (See Alphabet stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.