FWAC

By Christine Ji and William Gavin

Wall Street is grappling with a fundamental question: Are Google's AI Overviews bound to save search - or ruin the whole business?

Google's classic search engine is now being supplemented by new, artificial-intelligence features that are impacting revenue growth.

Google's core business, built upon ranking and indexing the open web, is facing a structural disruption as artificial intelligence changes how users navigate the internet.

When AI models like ChatGPT first became mainstream, there were concerns that consumers would query chatbots instead of turning to Google. In response to this threat, Google launched and expanded AI Overviews and AI Mode, placing AI summaries on top of traditional search results and introducing conversational search interfaces powered by its Gemini models.

But today, Google is back in the penalty box, even as these AI-powered search experiences have users asking far more questions of Google, as shown through the company's highest query growth in five years. But that couldn't keep parent company Alphabet (GOOGL) (GOOG) from delivering third-quarter results that fell short of Wall Street's expectations, with search and advertising revenue missing the mark.

"The risk to the search business appears to have gone up recently," D.A. Davidson analyst Gil Luria told MarketWatch over email. The 12% search growth in the third quarter is a significant step down from the 19% growth seen at the beginning of the year, and the company warned of further pressure to search-revenue growth in the fourth quarter. Google's paid click volume has decelerated sequentially this year, falling from 13% growth in the first quarter to 8% in the third.

"Changing consumer behavior may finally be impacting advertising revenue," Luria added.

The downturn appears top of mind for investors. Alphabet lost nearly $497 billion in market capitalization on Thursday, the second-greatest one-day loss for a U.S. company on record, topped only by Nvidia's (NVDA) decline in early 2025, according to Dow Jones Market Data.

Google's own AI initiatives could be driving this search slump. While the company's AI Overviews and AI Mode features have grown somewhat popular, the AI Mode in particular isn't as rife for monetization as traditional search.

Philipp Schindler, Google's chief business officer, told investors on Wednesday that the company is seeing lower AI Mode monetization, even as it records more queries. The company wants to change that, namely by expanding ads featured in AI Mode to new countries.

Also likely weighing on growth is the popularity of Google's rivals, such as OpenAI's ChatGPT or Anthropic's (ANT) Claude. Luria pointed to growing consumer interest in agentic consumer tools like Meta Platform's (META) Muse, which can cut traditional search out of the equation entirely.

"While we are early, advertisers are likely to follow those consumers at Google's expense," Luria said.

Advertisers are indeed pursuing new strategies to get their products noticed. In a standard search campaign, a business sets a budget and bids on specific keywords that trigger text ads to appear when a user types them into the search bar. And historically, businesses also counted on getting free traffic to their sites from search engine optimization as users browsed the web. But as users lean on chatbots and AI Overviews more often, organic traffic is declining.

"Many of the ad slots are now falling below the AI Overview, so a lot of people aren't making it to that area," Conner Crowe, a fractional marketing lead, told MarketWatch.

In his role, Crowe acts as a contract marketing director for businesses. Over the past three years he's seen a broader trend of growing advertising costs on Google alongside a decrease in clicks. Among 12 local businesses whose Google ads he manages, the median business now pays more than twice as much per click as it did in summer 2023, and 11 of the 12 pay more. The median business also saw a lower click-through rate, or the percentage of people who choose to click on an ad after seeing it.

Data from marketing firm Grey Matter supports these patterns, revealing that business-to-business search clicks cost roughly 21% more from April through September 2026 than a year earlier. "From where advertisers sit, Google's search auction keeps getting more expensive as AI changes how people search," Andy Hendricks, head of search at Grey Matter, told MarketWatch.

Now, businesses are increasingly looking to get surfaced in conversations in AI Overviews or chatbots, Crowe said. While Google search treats backlinks as a core ranking signal, organic mentions on different websites such as Reddit (RDDT) are a more likely indicator of being picked up and mentioned by a chatbot, Crowe said.

For both Crowe and his clients, the "highest quality" leads are coming from AI interfaces. "Getting found in AI search is like getting a really warm referral from a good friend," Crowe added.

However, the dynamics of AI-first discovery are still uncertain. Platforms like Reddit don't want their content appearing in AI conversations without driving visitors back to their own sites, which is already turning into a problem. Reddit's referrals from search took a major hit last quarter and that trend is set to continue, according to CEO Steve Huffman, who blamed Google's "aggressive" AI push.

"The reality is the AI Mode does not drive traffic, not for us and not to anybody, as far as I know," Huffman said on a Thursday earnings call. "It's just a fundamental shift in how Google works. It used to be a traffic driver, now it's not."

As new consumer habits unfold, Google is working on scaling ads within AI Overviews and AI Mode. Dan Flax, senior research analyst at Neuberger Berman, thinks that the search business can adapt to capture value from AI. Google has been experimenting with different ad formats within AI surfaces, Flax told MarketWatch, and he believes the company will be able to effectively monetize those conversational queries in the long term.

For now, Google is taking a "deliberate" approach that prioritizes user experience and engagement, Schindler said on Alphabet's earnings call.

"Google has an insane amount of users and an insane amount of habits formed, and they're in a very good position to make this transition [with AI] successfully," said Jed Ellerbroek, a portfolio manager at Argent Capital Management.

-Christine Ji -William Gavin

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10-31-26 0916ET