Is Alphabet Becoming the Next IBM?

The future of Alphabet, the parent company of Google, appears to be uncertain.

Alphabet (GOOG) is typically recognized as a top tech stock. It controls Google, the most popular search engine globally; Android, the leading mobile operating system; Chrome, which holds a significant share of the web browser market; and YouTube, the leading video streaming service boasting over 2.7 billion monthly active users. In addition, it offers a diverse suite of cloud-based productivity and infrastructure solutions.

During the last ten years, Alphabet's stock increased nearly 480%, driven by growth in its digital advertising and cloud services. From 2014 to 2024, its revenue expanded at a compound annual growth rate (CAGR) of 18%, while its earnings per share (EPS) grew at a CAGR of 23%.

However, Alphabet now faces significant challenges, particularly its core advertising business, which accounted for 76% of its revenue in 2024. Notably, generative artificial intelligence (AI) platforms, such as OpenAI's ChatGPT, are shifting how people seek information. Concurrently, shorter video platforms like ByteDance's TikTok and Meta Platforms' Reels are drawing advertisers and viewers away from YouTube's longer videos. Lastly, U.S. antitrust regulators are pressuring Alphabet to divest its Chrome or Android businesses.

This situation raises concerns among investors about whether Alphabet is on track to resemble the decline of IBM, which lost its dominance in the PC and enterprise software markets to more agile competitors over the last 40 years. But is that comparison justified, or is it overly pessimistic and overlooking key differences between Alphabet and IBM?

IBM's Major Missteps

IBM once ruled the personal computing sector in the 1980s and early 1990s but failed to own the intellectual property for the basic components of its PCs. Therefore, other manufacturers quickly produced cheaper "IBM PC clones" using the same hardware. To stand out, IBM attempted to introduce its own operating system, OS/2, but it ultimately failed as Microsoft Windows became the preferred OS among IBM PC clone users.

These missteps forced IBM to exit the PC market, culminating in the sale of its ThinkPad line to Lenovo in 2005. In 2014, it sold its server business to Lenovo as well. This history illustrated how a company's primary growth engine can deteriorate if its competitive advantage diminishes and it cannot keep pace with faster competitors.

By the late 2000s and early 2010s, IBM struggled to expand its aging enterprise software and IT services amid rising competition from cloud giants like Microsoft, Amazon, and Google. Instead of investing aggressively in new cloud services and transitioning its traditional on-premises software to the cloud, IBM opted to divest underperforming divisions, cut costs, and buy back shares to enhance its EPS.

IBM's fortunes only started to turn in 2020, when its cloud head, Arvind Krishna, took over as CEO, divested its ailing infrastructure services sector, and built on the acquisition of Red Hat (in 2019) to grow its cloud and AI endeavors.

Is Alphabet Following IBM's Path?

Critics argue that Alphabet might meet the same fate as IBM, as generative AI platforms increasingly handle search queries and weaken Google's search engine and targeted advertising effectiveness. Although Google is working on its own generative AI, Gemini, it risks becoming a lesser alternative in the AI sector if it lags behind offerings like ChatGPT or Microsoft's Copilot.

Moreover, since Android is an open-source operating system that others can modify, companies such as Amazon have leveraged it to introduce their own versions (like Fire OS), creating alternative ecosystems. Although Google’s cloud business continues to grow, it still ranks third in the cloud sphere, lagging behind Amazon Web Services (AWS) and Microsoft Azure.

On another front, YouTube, which significantly contributes to Alphabet's advertising growth, struggles to compete against TikTok and Reels. The platform's creators can easily post their content on rival services, often moving to whichever platform offers better revenue-sharing terms. In response, YouTube is expanding its subscription business, yet this change may indicate a slowdown in its advertising revenue growth in the coming years.

Additionally, the U.S. Department of Justice (DOJ) may further weaken Google’s position by insisting on the sale of Chrome, which is vital for its advertising revenue, and Android, which keeps around 2.5 billion users engaged with Google’s ecosystem.

Similar to IBM in its prime, Alphabet seems to be responding to these pressures by reducing its workforce, cutting costs, and repurchasing 11% of its shares in the past five years. However, its future remains uncertain if it does not adapt to the increasing demand for AI services.

Alphabet Isn’t IBM Just Yet

While it may seem easy to predict that Alphabet is headed the same way as IBM, it's essential to recognize that Alphabet's growth trajectory is still significantly more robust than that of Big Blue. Though its transition efforts have been somewhat awkward, they could yield positive outcomes in the future. Therefore, it remains critical to watch how Alphabet navigates its current challenges, as it may still retake momentum if it successfully aligns its strategy with modern demands.

Alphabet, IBM, Advertising, AI, Market