Are We Witnessing Alphabet Transform Into the Old IBM?

By the time IBM tried to expand its cloud business by acquiring SoftLayer in 2013, it had already far fallen behind Microsoft, Amazon, and Google. Its fortunes didn’t improve until 2020, when its cloud chief Arvind Krishna took the helm as its new CEO, divested its struggling infrastructure services business, and leveraged its acquisition of RedHat (in 2019) to expand its higher-growth hybrid cloud and AI businesses.

The bears expect Alphabet to face the same fate as IBM as generative AI platforms intercept more search queries and reduce the effectiveness of its search engine and targeted ads. Google is trying to catch up with its own generative AI platform, Gemini, but it could still end up as the OS/2 of the AI market if it falls behind ChatGPT and Microsoft’s Copilot.

Moreover, Android is still an open-source OS which can be modified by anyone. That makes it easy for companies like Amazon to launch their own forked versions of Android (Fire OS) and build their own app-driven ecosystems. Google’s cloud platform business is still growing, but it ranks a distant third in the cloud race behind Amazon Web Services (AWS) and Microsoft Azure.

Meanwhile, YouTube — which drives a lot of its advertising growth — doesn’t have a meaningful moat against TikTok or Reels. Its top creators can easily cross-post their content to those rival platforms, and they’ll likely shuffle toward the one which gives them the biggest cut of their ad revenues. YouTube is trying to offset that pressure by expanding its subscriptions business, but that strategic shift strongly suggests the growth of its advertising business will cool off over the next few years.

The U.S. Department of Justice (DOJ) could further erode Google’s defenses by forcing it to sell Chrome, which gathers data from its users for its core advertising business; and Android, which locks 2.5 billion users into its Google-powered apps.

Like the old IBM, Alphabet is trying to offset that pressure by pruning its workforce, cutting costs, and buying back 11% of its shares over the past five years. However, its future could remain murky if it fails to keep pace with the shift toward AI services.

It’s tempting to dismiss Alphabet as the next IBM, but it’s still growing a lot faster than Big Blue. Its expansion efforts have been undeniably clumsy, but they could still bear fruit over the next few years. I’d keep a close eye on its recent challenges, but I wouldn’t rule out a surprising comeback once it finally gets its act together.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, International Business Machines, Meta Platforms, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

Are We Witnessing Alphabet Transform Into the Old IBM? was originally published by The Motley Fool