Can Perplexity AI wrest power from search engine goliath Google?

Perplexity AI, an artificial intelligence search start-up, hopes to chip away at Google’s (NASDAQ:GOOG)(NASDAQ:GOOGL) dominance in the search arena, but do they really stand a chance in this race?

There has been a recent rise of AI-powered search options over the past few months. Google’s AI Overview, OpenAI’s SearchGPT and Microsoft’s (NASDAQ:MSFT) Bing all utilize generative AI to answer queries.

Perplexity has started shifting its business model from a subscription basis to advertising, which is more in line with how Google Search generates revenue. It is also receiving ample funding from big-time investors.

Late last month, Bloomberg reported Perplexity increased its valuation from $1B to $3B due to its latest round of fundraising. Early big names investors include Nvidia (NVDA) and Amazon (AMZN) founder Jeff Bezos, among others.

Perplexity’s search engine utilization is also on the rise. It answered approximately 250M questions in July, compared to 500M throughout the entirety of 2023, according to an in-depth article by the Financial Times.

“At the end of the day, the smaller player in the space has two advantages: velocity and focus,” said Perplexity Chief Business Officer Dmitry Shevelenko, in an interview with the Financial Times. “Our users and team only think about one thing when it comes to Perplexity: a place you get your questions answered. Competition sharpens our focus even more.”

Analysts have varying opinions when it comes to Perplexity’s chances of posing a risk to Google Search.

“I think Perplexity is a significant risk to Google Search over the long term,” said Seeking Alpha analyst Oliver Rodzianko. “From what I’ve observed, Google’s Gemini has less utility compared to ChatGPT.”

Perplexity does not build its own AI model, unlike Google, which utilizes its own model, Gemini. Rather, Perplexity uses a combination of existing AI systems, such as OpenAI’s ChatGPT, and builds upon them.

Perplexity used to rely on a licensed version of Microsoft’s (MSFT) Bing for its search index, but has since built its own.

“Perplexity enhances the quality of output by building on what ChatGPT and other major LLMs do well,” Rodzianko said. “Perplexity is also focused on academic sourcing, which poses a threat to Google Scholar.”

“I’m bullish on Alphabet, but I think it has to sharpen its commercial and professional utility with Gemini to stay competitive,” he added. “At this stage, Google is still well-positioned, and Search remains robust, partly because I think the use case for LLMs is distinct from traditional search functions at the moment, although this is subject to change.”

Google still held 91% of global market share in search across all platforms as of July 2024, according to data by StatCounter. It was 92% one year prior. The slight decline was driven by desktop users, where it has dropped from 83% to 80% of market share over the past year. On mobile devices, its market share of 95% remains virtually unchanged over the past 12 months.

“I don’t see a future where Google is going to be replaced by any search engine or an AI search start-up like Perplexity anytime soon,” said Seeking Alpha analyst Bohdan Kucheriavyi. “Despite the initial fears, OpenAI’s chatbot ChatGPT did not undermine Google’s search business, which according to the latest earnings report is thriving, and the integration of ChatGPT into Bing also did not help Microsoft capture a significant portion of Google’s market share. With the introduction of AI Overviews, it’s hard to see Google losing its dominance over the search market.”

“While start-ups like Perplexity will likely continue to raise more funds and grow their top-line thanks to several tailwinds such as the improving macro environment, higher ad spending, and the increasing interest for anything that has to do with AI, they are still far away from posing any threat to Google,” he added.