One of the biggest antitrust cases in decades could end up in a historic breakup. Or not.
Alphabet (GOOGL 0.72%) (GOOG 0.82%) investors have had a lot to digest in recent months. In August, U.S. District Judge Amit Mehta concluded that Google had illegally exploited its search dominance to quash competition and stifle innovation and ultimately engaged in monopolistic competition, thereby violating antitrust law.
In a court filing this week, the U.S. Department of Justice (DOJ) offered up a list of potential remedies to the judge, the most egregious of which was a breakup of the company.
The potential implications have some investors asking the quintessential investing question: Is Alphabet stock a buy?
Image source: Getty Images.
A wide range of potential outcomes
To be clear, DOJ officials are considering a number of remedies to address Google’s search dominance, and many of those are much less severe:
- A breakup of Alphabet into several smaller companies
- Forcing Google to share the data that underpins its search results
- Restrictions on how it mines data from other sites to fuel its search algorithms
- Blocking the company from paying rivals — including Apple — to be their default search engine.
- Preventing Google from using its Android, Chrome, Play, and other products to fuel its search engine.
The judge will have the last word and could choose any of the recommendations proposed by the DOJ or some combination of remedies.
Google didn’t take the news lying down, releasing a blog post saying the “DOJ’s radical and sweeping proposals risk hurting consumers, businesses, and developers.” The company went on to say the DOJ’s proposals “go far beyond the specific legal issues in this case.” Google plans to “respond in detail” to those proposals.
That said, it’s unlikely Alphabet will be broken up.
Here’s why a breakup is unlikely
Investors concerned about a breakup need only look to history to see just how rare such a drastic step is. After Microsoft was found guilty of being a monopoly in 2000, the court sought to break the company up into two parts. However, the verdict was partially overturned on appeal. Microsoft ultimately settled with the Justice Department to change some of its offending business practices.
While breaking up monopolies was commonplace in the early 20th century, it’s been decades since the most recent instance. In the early 1970s, AT&T controlled the vast majority of the nationwide phone system in the U.S. at a time when mobile phones were still on the drawing board, providing communication services to 90% of the homes in the country. The DOJ filed an antitrust lawsuit in 1974, and after a court battle that lasted eight years, AT&T agreed to break its business into seven regional phone systems.
This helps to illustrate just how rare these breakups are and why one is unlikely now.
What this means for investors
To be clear, a decision on the matter won’t be coming anytime soon. The judge has set a date for April 2025 to hear motions on a remedy and doesn’t plan to issue a decision until August. Even then, the legal case likely won’t be over, as Google has already said it plans to appeal the verdict, though it can’t even file an appeal until the judge issues his ruling. Furthermore, the appeals process is expected to last as long as five years, so this case is far from over.
So, what does that mean for investors? Until there’s a final disposition of the case — which is likely still years away — business will continue as usual. Google remains the undisputed leader in search, with 90% of the market. This fuels the company’s industry-leading digital advertising, which controlled 27% of the market last year. Then there’s Google Cloud, the third-largest of the “Big Three” cloud infrastructure providers, with 10% of that market. Artificial Intelligence (AI) also represents a large and growing opportunity for the company.
A breakup is unlikely, but if it does occur, it could benefit shareholders. There are aspects of Alphabet’s business that analysts don’t typically try to value, including YouTube and Waymo. If its disparate businesses are valued separately, the company may actually be worth more than many believe. In an interview with CNBC’s Fast Money, veteran tech analyst Gene Munster of Deepwater Asset Management suggests a breakup could unlock value in the company of between 15% and 20%. Furthermore, in the event of any divestment, existing shareholders would ultimately own shares in the resulting businesses.
Finally, the uncertainty resulting from the verdict has some Alphabet investors on edge. As a result, the stock has fallen 15% from its recent high, presenting a compelling opportunity. Alphabet stock is currently selling for just 23 times earnings, a significant discount to a multiple of 30 for the S&P 500. It’s also a discount to Alphabet’s average price-to-earnings ratio of 30 over the past decade.
This is all a long way of saying ignore the noise and buy Alphabet stock.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Danny Vena has positions in Alphabet, Apple, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Apple, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
