Alphabet (NASDAQ: GOOGL) may be stronger than it appears
Alphabet’s (NASDAQ: GOOGL) stock has lagged its brethren in recent months amid government anti-trust investigations and concern about the impact of artificial intelligence.
The technology titan’s shares have dipped 2% over the past 12 months, compared to an 11.7% rise for the tech-heavy Nasdaq Composite index.
As for the anti-trust issue, the government is going after Alphabet, owner of Google, for its domination of search engines and ad software. Alphabet already lost the search and advertising cases in court. Judges haven’t determined remedies yet, but the government has urged that Alphabet be broken up.
The European Union also is in the midst of an investigation of Alphabet’s ad preeminence. It already faces a $4.33 billion anti-trust fine related to its Android operating system.
Then there’s AI. Investors are concerned that Alphabet’s competitors on AI will eat away its search business. Those competitors include Open AI’s ChatGPT and Elon Musk’s Grok, which is part of xAI. Search is crucial to Alphabet, with advertising through the search function accounting for 60% of its revenue. Google controls 90% of the search market.
The case for a breakup
Some experts say the company needs to make changes. D.A. Davidson analyst Gil Luria ironically believes that the government’s recommended punishment against Alphabet – a breakup – is actually Alphabet’s solution.
“The only way forward for Alphabet is a complete breakup that would allow investors to own the business they actually want — the top competitors to Netflix (NASDAQ: NFLX), Amazon Web Services (NASDAQ: AMZN)/Microsoft Azure (NASDAQ: MSFT), Trade Desk, and Uber (NASDAQ: UBER)/Tesla (NASDAQ: TSLA),” he wrote in a commentary.
Netflix is a competitor of Alphabet’s YouTube, AWS and Microsoft Azure are competitors of Google Cloud, Trade Desk is a competitor to Alphabet in digital advertising, and Uber and Tesla compete against Alphabet’s autonomous driving company Waymo. When it comes to Waymo, experts say it’s ahead of Uber and Tesla in developing autonomous vehicles.
Alphabet’s breakup value
Alphabet’s pieces could be worth a total of about $240-$300 per share, Luria says, compared to the conglomerate’s current stock price of $184. That could mean a market cap of up to $3.1 trillion, up from $2.2 trillion now.
In any case, it’s unclear whether Alphabet will actually be broken up. Many legal experts say the government has a weak case against the company, because the acquisitions that have helped it establish market dominance were approved by the government itself. Any punishment from the government could be a lot lighter than a breakup, perhaps a spinoff of some units.
Looking at price-earnings ratios, they too seem to paint a bullish picture for Alphabet, suggesting it might be undervalued. Its forward price-earnings ratio totals 19.33, compared to 29.59 for the Nasdaq 1000 index.
Turning to AI, it may actually help Google Search, because it has its own AI function, Gemini. So consumers may want Google Search for one-stop shopping — AI information plus traditional search listings.
Alphabet’s growth from a humble search engine (Google) in the 1990s to a tech colossus today has been stupendous. Thus the company’s challenges match the size of its tremendous progress.
