U.S. Markets closed

A DOJ Probe Certainly Will Cause Google Stock to Underperform

Larry Ramer

The likely upcoming antitrust probes Alphabet (NASDAQ:GOOG) probably won’t destroy Google stock, but the investigations could significantly negatively affect both companies’ businesses.

Google Stock Is a Great Long-Term Investment, but Wait to Buy

Source: Brionv via Wikimedia (Modified)

Google could be meaningfully hurt by the outcome of the likely probes that would reportedly be conducted by the U.S. Department of Justice.

The DOJ Could Hurt Google Stock

It’s hard to determine a viable means that the DOJ would have of breaking Google’s internet search monopoly. Forcing consumers to access one search engine for some types of goods and another for a different type of products seems complicated and unwieldy.

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Moreover, forcing part of the country to access a different search engine would certainly be an unprecedented intervention by the government in the nearly 25 year history of the internet. The fact is, Americans love using Google, so making them use a different search engine would be very unpopular.

But DOJ could attack two smaller, but still-important businesses owned by Google: Google Shopping and Google’s display ad business. Taken together, the actions that the DOJ could take against these businesses could negatively affect Google stock.

The Risk to Google Shopping

Google Shopping has apparently become quite important to Alphabet stock. In the first quarter of 2018, spending on Google Shopping ads accounted for  “76.4% of retail search ad spend in the U.S.

It also appears that Shopping may be responsible for a significant portion of the growth of Google’s ad revenue, as Google CEO Sundar Pichai told investors last February that, “[T]he number of shopping daily active users on Google.com during the (2018) holidays doubled compared to last year.”

The EU took its own action against Google Shopping in 2017. One of the results of its action was that GOOG now shows ads for other shopping engines on Google Shopping. 

Google doesn’t reveal how much revenue Google Shopping generates, but according to one estimate, total U.S. digital ad spending by retailers was slated to come in at $23.5 billion in 2018.

If we assume that 50% of that total was spent on search, then Google generated about $9 billion of revenue from Google Shopping in the U.S., according to Search Engine Watch’s data. Using operating margins of 80% for this estimation, then Google’s total operating profit from Google Shopping in the U.S. would have been $7.2 billion.

Google and Display Advertising

Assuming further that the DOJ takes similar measures against Google Shopping as the EU did, and that those actions lower the revenue generated by Google Shopping by 20%, then Alphabet’s overall operating profit would drop by $1.15 billion. Since the company’s total operating income in 2018 was $7 billion, a drop of more than $1 billion would have a meaningful impact on Google stock.

The company’s Display ad business could be hurt if the DOJ limits Alphabet’s ability to collect data on internet users. CNBC noted that Google collects data “from all of the Google services” used by consumers.Alphabet apparently uses that data  to enable purchasers of display ads to ” target many millions of people based on how they have behaved online. as well as based on their search history.”

If the DOJ limits the company’s ability to collect data, Google’s display ads will become less appealing to many marketers. Alphabet’s global revenue from display ads is expected to come in at about $17 billion this year. If the U.S. accounts for 50% of that total, and the DOJ’s efforts lower the unit’s revenue by 30%, then, using the same assumptions we utilized previously, Alphabet’s total operating income would drop by about $2 billion.

Any action by the DOJ’s against Google Shopping and Display reasonably could lower Alphabet’s operating income by nearly 30%.

The Bottom Line on Google Stock

Unlike Amazon (NASDAQ: AMZN) and Facebook (NASDAQ:FB), Google doesn’t have to worry about being broken up by the government. Still, there’s a good chance that DOJ will force it to take measures that will badly damage their businesses.

Meanwhile, with Amazon getting an ever-larger share of Google’s digital ads income, the negative catalysts just keep adding up. Expect Google stock to underperform the market over the next year.

As of this writing, the author did not own shares of any of the companies named.

More From InvestorPlace

Compare Brokers

The post A DOJ Probe Certainly Will Cause Google Stock to Underperform appeared first on InvestorPlace.