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Alphabet Stock Investors Shouldn’t Sweat Antitrust Spotlight

Wayne Duggan

Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) stock price has lagged the S&P 500 in 2019 despite some impressive growth numbers. One of the biggest reasons investors are skeptical is due to concerns about antitrust action.

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Antitrust fears were stoked last week on reports of two new big tech probes by 48 U.S. state attorneys general. While the antitrust news may create headline volatility in the near-term, it’s nothing for GOOGL stock investors to be concerned about in the long-term.

Here’s a look at exactly why investors are worried and why they shouldn’t be.

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New Google Probes

Texas Attorney General Ken Paxton confirmed this week that he is leading 47 other state attorneys general in a bipartisan antitrust investigation of Google. The probe is reportedly focused on Google’s dominance in online advertising and its use of consumer data.

The new state investigation comes after the Wall Street Journal previously reported that the Department of Justice is conducting its own antitrust investigation of Google.

On the surface, antitrust investigations are serious business. The Federal Trade Commission (FTC) has already fined Google for mishandling user data. But antitrust violations could potentially result in changes to Google’s core algorithms or even a breakup of the company.

Analyst Take on Alphabet Stock

The good news for GOOGL stock investors is that it seems extremely unlikely regulators will actually break up Google or any other big U.S. tech companies. Wedbush analyst Daniel Ives says the investigations are most likely just noise.

Politicians and regulators are mostly just responding to outspoken critics of the big tech platforms. Ives says fines and potential forced changes to Google’s business model are likely the worst-case scenario for Alphabet stock. Ironically, he says a forced breakup might unlock shareholder value.

“We continue to believe on a SOTP basis the valuation for names such as Amazon, Google, and Apple would be re-rated higher in the unlikely scenario there were ever significant business model breakups, such as the separation of AWS from Amazon’s retail e-commerce business,” Ives says.

For Alphabet, a potential antitrust breakup could include a forced spin-off of YouTube, for example. But if Ives is correct, separating the high-growth YouTube from Google’s core search business could lead to a much higher valuation of YouTube.


Slap On The Wrist?

At the same time, Google’s recent FTC settlement for violating children’s privacy laws was $170 million. To put that in perspective, Alphabet reported about $10 billion in net income in the second quarter alone. Any antitrust fine would have to be absolutely massive to make a dent in Google’s cash flow. Even then, the positive impact of moving on from the antitrust crackdown could outweigh the temporary impact of a fine in the eyes of the market.

Altering the ad business or the algorithm would be the worst-case scenario in my mind. But these types of changes are rarely as bad as the market assumes they will be.

Of course, there could ultimately be no action at all taken against Google. After all, being big isn’t a monopoly. Unless investigators can prove non-competitive practices, Google may get off scot-free.

GOOGL Stock Will Be Just Fine

As I said back in July, GOOGL stock has way too much going for it in the long-term for investors to be scared of these antitrust probes. Google is a market leader in secular high-growth fields such as internet and mobile search, online advertising, artificial intelligence, cloud services, machine learning and autonomous vehicles. It’s still growing at roughly a 20% clip. Yet Alphabet stock is trading at 22 times forward earnings.

“We believe that Congress will investigate claims of anticompetitive behavior, but ultimately, we expect a ‘no harm, no foul’ outcome on these FAANG names once the DOJ concludes its potential investigation, although this news could add some headline risk to these tech stalwarts in the near-term,” Ives says.

I agree. Since when have politicians actually done anything productive or useful lately? They will make a big production out of this antitrust investigation. They will ultimately slap some kind of fine on Google or force them to make some minor adjustments to their model. Life will carry on, and GOOGL stock investors can stop talking about Washington and start talking about technology.

As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.

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