(Bloomberg) -- The only thing that matters to Alphabet Inc. investors is whether it can get artificial intelligence right.That was the message delivered this week as the company's shares tumbled following news that Google's flagship AI product was misfiring. The selloff erased $80 billion in market value in a single day, underscoring the importance investors now place on all things AI.For a firm with the world's biggest digital advertising business — its operations generated more than $100 billion in cash last year, with a record chunk of that going back to shareholders — the threat is simple: some other company may develop an AI-powered search engine that, as unlikely as it may seem now, makes Google obsolete.“Alphabet falling behind in AI is a clear and present danger,” said Tom Graff, chief investment officer at Facet. “The downside is so significant for Alphabet that there's really no way to price it in.”Shares fell 0.2% on Friday. The stock is negative this year, compared with a gain of about 15% for the Bloomberg Magnificent 7 Total Return Index.Such a scenario would imperil the nearly $200 billion in revenue Google is expected to generate from search this year — a business that Alphabet rides for the bulk of its profits.Alphabet has been among the most valuable companies in the world for most of the past decade, primarily because of the dominance of its web advertising business. But it's been overtaken this year by Nvidia Corp. — whose rise has made it the poster child for the AI mania that has rearranged the stock market.While it still dominates search, and the company is hardly in existential danger, missteps in AI marked a stunning setback for a firm known for its technological prowess — raising the question of whether investors can count on Alphabet to stay at the front of the pack. More than a year after the debut of OpenAI's ChatGPT, Alphabet is still struggling to prove that its technology can compete despite spending heavily in the field for years.Read More: Google In ‘Terrible Bind' From Pulling AI Feature Under PressureAs a result, the stock has been sensitive to any sign of strength or weakness on the AI front. The February slump recalled a similar event from last year, when concerns over the accuracy of its Bard chatbot spurred heavy selling, and in December, the well-received release of the company's Gemini AI model prompted a relief rally.Investors are so attuned to the risks of falling behind in AI that they're turning a blind eye to a stock that is by far the cheapest of the biggest US technology companies at about 19 times profits projected over the next 12 months. Meanwhile, Alphabet's outlook for revenue and profit growth over the coming year is in a league with Microsoft Corp. and far better than Apple's, even though the stock trades at a big discount to both.Search is considered a primary use case for generative AI and chatbots, which means Alphabet's dominant market share is at risk, while Microsoft — which has been incorporating AI features into Bing — has nowhere to go but up, and this factor has insulated Microsoft shares from its own controversies. So far, Alphabet has maintained its dominance with about 91% of worldwide search share, compared with about 3.4% for Bing, according to Statista data.“Of course, it has a ‘moat' in search, but this space is about to be disrupted,” wrote Melius Research analyst Ben Reitzes, who called Alphabet “cheap for a reason.” He added that Alphabet is outflanked by megacap peers in terms of factors like growth, recurring revenue, and margin optimization.Read More: Google, Microsoft Risk Ongoing Backlash by Deploying Flawed AIStill, few who follow AI are counting out Alphabet. It has invested in the technology for years and boasts the kind of infrastructure and engineering talent that is seen as needed to put out a competing product.Bernstein's Mark Shmulik wrote that he felt compelled to defend Alphabet, even though he is among the 15% of analysts without a buy rating on the stock.“Ever since OpenAI launched ChatGPT in late 2022, Google's response looks more like a body builder who's been told his muscles are all show, picking fights and getting beat up,” he wrote. However, “at the point in time when Gen AI answers have gained consumer trust, Google should be best positioned to integrate these results alongside web query results thereby offering consumers the best of both worlds.”Getting to that point, however, could be lengthy and expensive. “They have the resources and capability to produce something credible, but we don't know if it will be a major growth driver,” said Philip Lawlor, head of market research at Wilshire Indexes.“If you don't have a credible product, then it becomes about survivability.” Tech Chart of the DayAdvanced Micro Devices Inc. shares have extended a surge to hit the latest in a series of fresh records this year. Seen as one of the primary beneficiaries of artificial intelligence, optimism about new AI processors has helped AMD shares recover from a weak forecast. Top Tech NewsElon Musk sued OpenAI and Chief Executive Officer Sam Altman, alleging they have breached the artificial intelligence startup's founding agreement by putting profit ahead of benefiting humanity.Dell Technologies Inc. headed for its biggest gain in six months after reporting better-than-expected sales and profit, fueled by demand for information technology equipment to handle artificial intelligence work.Tesla Inc. rolled out a number of incentives to boost sales in China, where it is coming under increased pressure from local rivals such as BYD Co.The top US diplomat in Hong Kong sounded the alarm over growing internet censorship in the city, underscoring fears China's crackdown on freedoms is diminishing the hub's appeal as a global finance hub.The US will investigate potential data and cybersecurity risks posed by Chinese electric vehicles and other internet-connected cars, the Commerce Department said Thursday, intending to act before their manufacturers expand into American markets.Earnings Due Friday No major earnings expected--With assistance from Subrat Patnaik.(Updates to market open.)More stories like this are available on bloomberg.com©2024 Bloomberg L.P.