
Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) is often considered a reliable blue chip tech stock. It owns Google, the world’s most widely used search engine; Android, the largest mobile operating system; Chrome, which dominates the web browser market; and YouTube, the top streaming video platform with over 2.7 billion monthly active users. It also provides a broad range of market-leading cloud-based productivity and infrastructure services.
Over the past decade, Alphabet’s stock rallied nearly 480% as its digital advertising and cloud businesses expanded. From 2014 to 2024, its revenue grew at a compound annual growth rate (CAGR) of 18% as its EPS increased at a CAGR of 23%.
But today, Alphabet’s core advertising business, which generated 76% of its revenue in 2024, faces three existential challenges. First, generative artificial (AI) platforms like OpenAI’s ChatGPT are changing how people search for information. Second, short video platforms like ByteDance’s TikTok and Meta Platforms‘ Reels are pulling advertisers and viewers away from YouTube’s longer-format videos. Lastly, U.S. antitrust regulators are pressing Alphabet to sell Chrome or Android.
Some investors might be wondering if Alphabet is doomed to become the next IBM, which lost the PC and enterprise software markets to its nimbler competitors over the past four decades. But is that a fair comparison, or is it just a bearish hyperbole which overlooks the actual differences between Alphabet and IBM?
IBM dominated the personal computing market in the 1980s and early 1990s, but it didn’t actually own the IP to any of the off-the-shelf components in its PCs. As a result, other PC makers produced cheaper “IBM PC clones” with the same hardware. IBM tried to differentiate itself from those clones with its own operating system, OS/2, but that effort flopped as Microsoft Windows became the dominant OS for IBM PC clones.
Those failures forced IBM to back away from the PC market, and it eventually sold its ThinkPad PC business to Lenovo in 2005. It also sold its server business to Lenovo in 2014. That retreat shows how a company’s core growth engine can wither if its moat dries up and it fails to keep up with its nimbler competitors.
By the late 2000s and early 2010s, IBM was struggling to expand its aging enterprise software and IT services divisions against cloud-based competitors like Microsoft and Amazon, and Google. But instead of aggressively investing in new cloud services and transforming its on-premise software and services into cloud-based ones, IBM focused on divesting its weaker units, cutting costs, and buying back more shares to boost its EPS.