Alphabet Considers Breakup Amid Regulation
Alphabet Inc. (NASDAQ:GOOG) investors are facing a prolonged period of uncertainty as discussions about a potential breakup of Google gain traction. The Justice Department is reportedly considering breaking up Google, with Android and Chrome among the most likely units for divestment, according to Bloomberg News. This development has surprised Wall Street, which had previously deemed a breakup unlikely despite a recent federal court ruling that found Google in violation of antitrust laws for monopolizing the search market.
This new regulatory risk adds to the existing concerns surrounding Big Tech, which is already grappling with uncertainties related to artificial intelligence (AI) and search technologies. Alphabet plans to appeal the recent antitrust ruling, which could prolong the overhang on its stock.
Howard Chan, CEO of Kurv Investment Management, noted that while Alphabet remains a robust business capable of generating revenue in the interim, the situation is likely to lead to increased volatility. “There’s a lot of uncertainty about how this will resolve itself, and an answer won’t come for months,” Chan commented.
Stock Performance and Market Sentiment
Alphabet’s shares fell by 2.3% on Wednesday, wiping out over $47 billion in market value. This decline came despite the company’s recent unveiling of AI-enhanced devices, which were poised to compete with Apple Inc.’s (NASDAQ
) iPhone 16. The stock has dropped 16% from its peak in July but remains up 15% for the year. Shares gained 0.3% on Thursday.
The broader tech market is experiencing a shift as investors move away from expensive technology stocks towards more affordable sectors. Concerns about the U.S. economy and the delayed returns on heavy AI investments are contributing to this trend. Alphabet’s recent financial results highlighted higher-than-expected capital spending and a disappointing performance from YouTube, further fueling investor anxiety.
Breakup Potential and Market Valuation
Despite these challenges, Alphabet continues to show strong growth and cash flow. The company recently announced a substantial shareholder return program, though long-term regulatory issues could dampen these positive factors. Scott Yuschak, managing director of equity strategy at Truist Advisory Services, emphasized that a breakup could significantly impact Alphabet’s ability to fund AI projects and return cash to shareholders. “Big tech companies benefit from scale, and if you take that away through a breakup, a price will be paid,” Yuschak said.
On the other hand, Alphabet’s stock is currently valued at nearly 19 times estimated earnings, a discount compared to its historical average and the market overall. It is also the least expensive among the “Magnificent Seven” tech giants and is projected to deliver robust earnings and revenue growth in the coming years. This valuation has led to strong buy recommendations from analysts, with an average price target indicating a potential upside of nearly 30%.
Some analysts see a breakup as a potential value unlock. Needham analyst Laura Martin estimated that separating Alphabet’s components could result in a 10%-15% increase in value, with YouTube potentially fetching a valuation of up to $643 billion if traded independently. Doug Kass, president of Seabreeze Partners, also suggested that splitting Alphabet could reveal the true value of its various businesses.
Featured Image: Megapixl
