AI is changing the lucrative search business. Here's how to pick the winners — and avoid the losers

Concerns regarding AI's potential to significantly reduce web traffic and search revenue appear largely overblown, despite initial studies indicating a decline in traditional search clicks. Google's robust Q2 performance, with search sales reaching $54.2 billion and advertising revenue growing 10% to $71.3 billion, suggests the 'death of search' narrative is premature, as analysts view AI adoption as incremental and monetizable. However, businesses heavily reliant on search referral traffic, like TripAdvisor or specific e-commerce platforms, face a nuanced challenge, potentially leading to decelerated top-line growth or margin compression, a risk not fully priced into current consensus estimates.

Analysis

Market concerns regarding the cannibalization of web search traffic by AI appear overstated, particularly for industry leaders like Alphabet. This perspective is substantiated by Alphabet's recent second-quarter performance, which defied bearish sentiment with search sales hitting $54.2 billion and advertising revenue expanding 10% to $71.3 billion. Analyst commentary from Wedbush and Bank of America reinforces this view, suggesting AI-driven usage is largely incremental and that Google's key performance indicators, such as traffic and mobile daily active users, remained stable through July. However, the threat is not uniform across the digital landscape. A significant risk exists for companies highly dependent on search referral traffic, which, according to a Bain study, could shrink by 15-25%. Barclays anticipates these firms will face a difficult choice between decelerating top-line growth or compressing margins by increasing spending on customer acquisition. This risk appears particularly acute for companies with a low direct traffic mix, such as TripAdvisor at 29%, and others including Expedia, eBay, NerdWallet, and Chegg, with current consensus estimates potentially not fully pricing in these medium-term headwinds.

Key Decisions for Investors

• Consider Alphabet's (GOOGL) resilience and potential to monetize AI, as strong Q2 earnings and stable search metrics suggest market fears of AI cannibalization are disproportionate.
• Scrutinize holdings in travel and e-commerce, differentiating between companies with high direct traffic like Airbnb and those more vulnerable to search referral declines, such as TripAdvisor and Expedia.
• Monitor upcoming earnings reports from at-risk companies like eBay, Wayfair, and Chegg for early signs of margin compression or slowing growth, as Barclays suggests these risks are not yet reflected in consensus estimates.
• Evaluate potential contrarian opportunities like Pinterest (PINS), where specific monetization and engagement initiatives may be overlooked by the market amid the broader focus on AI's impact on search.