Alphabet Inc. investors are facing a long period of uncertainty as they grapple with a scenario they previously saw as unlikely: a possible breakup of Google.
A bid to break up Google is being considered by the Justice Department, Bloomberg News reported Tuesday, with the most likely units for divestment the Android operating system and the Chrome web browser. The news surprised Wall Street, which had seen a breakup as unlikely even after a federal judge ruled earlier this month that Google has illegally monopolized the search market.
While dismantling the company is only one of the options that the Justice Department is looking at, the news adds risk when investors have already been on edge about Big Tech’s prospects. And with the company planning to appeal the search market antitrust ruling, any overhang on Alphabet’s stock could last for some time.
“There’s a lot of uncertainty about how this will resolve itself, and an answer won’t come for months,” said Howard Chan, chief executive officer at Kurv Investment Management. “Alphabet is still a strong business, and it will still generate revenue until there’s a resolution, but this also comes at a time when there are a lot of questions about AI and search. We should expect more volatility from here.”
The shares fell 2.3% on Wednesday, erasing more than $47 billion in value, with the Justice Department news overshadowing Google’s unveiling of AI-infused devices that will beat Apple Inc.’s iPhone 16 to the market. The stock is down 16% from its July peak, though it remains up 15% this year.
Big Tech investors are already nervous. They’ve been rotating out of expensive technology stocks in favor of cheaper sectors since mid-July amid concerns about the health of the US economy, and are growing increasingly impatient to see heavy spending on artificial intelligence paying off.
Alphabet’s results last month didn’t help. Capital spending was higher than expected as the company continues to invest aggressively in AI, while a miss for the YouTube business also disappointed. Still, Alphabet continues to generate strong growth and cash flows, and earlier this year announced a massive shareholder return program. But these tailwinds could be diminished by a long-term regulatory overhang.
“The only reason these companies can fund massive AI projects and still return cash to shareholders is that they’re so big, and a breakup would certainly impact that dynamic,” said Scott Yuschak, managing director of equity strategy at Truist Advisory Services.
“Big tech companies benefit from scale, and if you take that away through a breakup, a price will be paid. We’re not yet sure what that will be. This has become a big new question mark.”
One factor that could limit downside risk is that Alphabet screens as a bargain compared with other tech megacaps. The stock trades at nearly 19 times estimated earnings, a discount to its 10-year average and the market overall. It’s also the cheapest of the Magnificent Seven names, and is expected to deliver double-digit earnings and revenue growth for 2024 and the subsequent two years.
As a result, it remains well liked on Wall Street. More than 80% of analysts recommend buying the stock, and the average price target points to upside of almost 30%.
Some may even welcome a breakup, seeing such an outcome as a way to unlock value. Earlier this month, Needham analyst Laura Martin calculated that splitting up Alphabet would drive 10%-15% upside, as investors generally pay more for pure-play assets. YouTube alone, she argued, could fetch a valuation as high as $643 billion if separately traded. That would make it four times bigger than Walt Disney Co.
Doug Kass, president of Seabreeze Partners, agrees. “If you go through the component parts, there are a lot of valuable businesses that are somewhat obscured by the conglomerate,” he said.
“I think it would be worth more split up than together.”
Tech Chart of the Day
Cisco Systems Inc. shares saw a positive reaction to the company’s latest results, but the maker of computer networking equipment remains far from record levels. As of their last close, the shares are still more than 40% below a peak hit in the dot-com era.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out our videos.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
Read more articles by Ryan Vlastelica
