Financial analysts at Pivotal Research Group have issued a stark warning to investors, suggesting the artificial intelligence (AI) sector could be headed for a significant and turbulent correction. In a recent note to clients, the firm cautioned that mounting obligations could force ChatGPT-maker OpenAI to slash its spending, potentially triggering broader market instability.
A Looming "Pretty Ugly" Phase for AI Stocks
The research note paints a concerning picture for the near future of AI investments. Analysts explicitly warned, "It is likely to temporarily get pretty ugly for AI stocks and the market in general." They draw a parallel to the dot-com bubble burst of 2000, forecasting a similar "healthy weeding out process." This shakeout, they argue, will ultimately leave fewer, much more dominant players in the field.
Pivotal Research firmly positions Google-parent Alphabet as the company best poised to lead this consolidation. "We believe the shakeout, if it happens, will mirror 2000 and will inevitably be a healthy weeding out process leaving fewer much more dominant competitors, with Google leading the way," the note stated.
Google's Dual Advantage: Gemini AI and Custom Chips
The analysts highlight two primary drivers for Google's anticipated supremacy: its Gemini AI technology and its custom Tensor Processing Unit (TPU) semiconductor chips.
On the AI front, Pivotal expects Google Gemini to steadily gain market share against OpenAI's ChatGPT. This trend is likely to be accelerated by Google's strategic partnership with Apple for AI integration. The firm suggests this mounting pressure could seriously challenge OpenAI by 2026, potentially forcing it to cut capital expenditures due to "massive obligations and likely falling OpenAI share."
Perhaps more significantly, the report shines a light on Google's TPU technology as a "sustainable competitive advantage." Analyst Jeffrey Wlodarczak believes these chips could become a "material driver of value" as Google sells them to external companies. This move could directly challenge Nvidia's dominance in the AI chip market.
The note points to growing commercial interest as evidence: AI firm Anthropic agreed in October to access up to 1 million TPUs, and a recent report indicated Meta Platforms is in talks to spend billions on Google's chips. Google Cloud executives have suggested the TPU business could generate up to 10% of Nvidia's annual revenue. Wlodarczak argues that Google's semiconductor advancements could not only capture market share from Nvidia but also help drive down the overall cost of AI chips.
Price Target Raised on Strong Core Business
Reflecting this bullish outlook, Pivotal Research has raised its price target on Alphabet stock to $400 from $350, maintaining a 'Buy' rating. The upgrade cites continued momentum in Google's core operations, particularly its search business, which is described as a "resilient cash cow with pricing power."
The analysts note that as Gemini AI captures more search market share, the economics with device manufacturers improve compared to traditional search deals, potentially boosting Alphabet's profit margins. This confidence is backed by strong financials, with Alphabet's revenue reaching $385.48 billion, growing at 13.42% year-over-year.
"Google appears to be the best positioned of its peers to monetize AI investment internally and externally," Wlodarczak concluded, summarizing the firm's positive stance based on Gemini's success, the robust search business, and the promising custom silicon venture.
