Alphabet's Stock Faces Uncertainty Following Antitrust Ruling

Google Is Ruled a Monopoly. Should Investors Dump Alphabet Stock? | The Motley Fool

A U.S. federal judge has ruled that Google, owned by Alphabet (GOOGL 1.01%), has violated Section 2 of the Sherman Act, indicating that the company has unfairly acted to maintain a monopoly. The heart of the government's antitrust case centered on exclusive deals the company struck with smartphone makers such as Apple (AAPL 1.37%) and Samsung to be the default search engine of their mobile devices. These deals have become quite large over the years. For example, Google has a reported $8 billion, four-year deal with Samsung, while a revenue-sharing deal with Apple is believed to be worth over $20 billion a year. In 2021, Alphabet paid over $26 billion to provide the default search engine on various smartphones and web browsers. The questions for investors are: What is happening now, and how will this impact Alphabet stock in the future? Alphabet undoubtedly will appeal the ruling, while a separate ruling to determine penalties will also need to take place. This will take some time to play out. First and foremost, the ruling could mean the end of exclusive search deals where Google will automatically become the default search browser for mobile devices. Instead, users could be given a choice of which search engine to use when they set up their mobile devices. There has been talk of simply adding a "choice screen" to the device's initial setup process, allowing users to switch their default engines from Google to another search engine. In the most severe case, the company could be broken up, but that seems unlikely. Ironically, Microsoft (MSFT 0.83%) was a primary witness in the case, although it certainly had deep-enough pockets to try and strike its own exclusive search deals. Microsoft, meanwhile, was found guilty of its own antitrust practices back in 2000. The government case against this company largely stemmed from bundling its Windows operating system with the Internet Explorer browser. Around the time of the Microsoft verdict, a quarterly magazine from the Teach Democracy foundation wrote: "Microsoft now faces legal consequences as well as rapidly evolving technologies. Both may challenge its domination of the computer software industry." The same thing could be written about Google today, especially with the advent of artificial intelligence (AI). Notably, 24 years later, the impact on Microsoft from both the court decision and evolving technologies appears to have been negligible in terms of its dominance in operating systems and worker-productivity tools. The same could very well hold true for Google. While Google benefits from these deals, its name is synonymous with search at this point. Given the choice, it's highly unlikely a meaningful number of users will switch to a different default search engine. Now in his ruling, Judge Amit Mehta wrote: Google, of course, recognizes that losing defaults would dramatically impact its bottom line. For instance, Google has projected that losing the Safari default would result in a significant drop in queries and billions of dollars in lost revenues. However, this loss in revenue would likely come from Google being replaced as a default search engine, not as one of several options from which users can choose. In this case, any deals with mobile companies and browsers will now likely be for much less money, while there is a strong chance its market share is barely impacted, much like how Windows' market share wasn't affected by the 2000 ruling. Given the court ruling, there is certainly a lot of uncertainty hanging over Alphabet, and one thing the market doesn't like is uncertainty. However, the long-lasting impact of the ruling on the company is likely to be quite minor. Google did not become the dominant search engine because of these deals; it was already the leader even before the advent of smartphones. Bing is unlikely to suddenly gain a lot of market share, while AI-powered upstarts are burning through cash and need to be able to gain share and monetize their users while being sub-scale. Apple could build or buy its own search engine, but its closed-wall ecosystem is already facing much scrutiny. As such, I feel that much like Microsoft Windows has remained the king of PC operating systems, Google will continue to be the dominant player in search. At the same time, the company's Q2 results have started to show the positive impact AI can have on its search business. AI provides an opportunity for the company to monetize a lot of search queries that it previously was not monetizing, as it only displays ads on about 20% of its searches. It is now just beginning to show new types of ads associated with queries that pull up AI-generated answers. Trading at a forward price-to-earnings (P/E) ratio of just over 18 times 2025 analyst estimates, Alphabet's stock is attractively priced, given its growth and the opportunities in front of it. Investors focused on the long term might find Alphabet's recent stock weakness a good buying opportunity.

Should You Buy Alphabet Stock Following Its Antitrust Defeat? 3 Tech Watchers Weigh In. | The Motley Fool

On Aug. 5, Judge Amit Mehta ruled that Alphabet has illegally stifled competition in the online search market. In his 277-page ruling, Mehta concluded, "Google is a monopolist, and it has acted as one to maintain its monopoly." So, what does this all mean for Alphabet and its stock? In this article, three Motley Fool contributors discuss Alphabet's prospects and how investors should react. Jake Lerch: In a nutshell, there are two key takeaways from the recent antitrust ruling: First, let's examine why it's a problem. It should come as no surprise that losing the case is a negative outcome for the company. After all, at the very least, Alphabet will have to spend more time and money appealing the ruling (which the company has already announced it will do). That process will likely drag out for several more years. However, if Alphabet's appeals fail, the company will be forced to settle the lawsuit or accept the judge's yet-to-be-revealed remedies. Neither of those options is favorable, as they could mean paying tens of billions of dollars in fines and legal settlements. In addition, the government could seek changes to Alphabet's business practices. Specifically, the government now finds itself in a powerful position to demand alterations to Google Search -- which is the company's most lucrative business segment. All in all, this ruling introduces significant uncertainty to Alphabet and its stock. Yet there are silver linings. For one thing, the ruling focuses on Alphabet's practice of paying other companies to make Google Search their default search engine. Apple, for example, received over $18 billion in 2021 in exchange for making Google the default search engine across its products. Alphabet also has deals with Samsung and numerous other device makers, and Mozilla, the nonprofit project behind Firefox. Those agreements are now on the chopping block, which, in a strange twist of fate, may temporarily boost Alphabet's profits. Since the company won't be paying device makers like Apple to make its search engine the default, it should save billions of dollars per year. What's unclear is whether Google will lose significant search-engine market share in response, which would hurt profitability. In any event, there's no reason to believe that Google's search dominance will end quickly. As noted earlier, the appeals process will likely drag out for several years. In the meantime, Alphabet will continue to rack up billions in revenue and profits. So, while this ruling highlights why Alphabet isn't a stock for every investor, I remain bullish on it. Justin Pope: Alphabet's loss in the antitrust lawsuit shouldn't be a shock -- Google has over 90% market share of internet search worldwide. Ultimately, the company's anticompetitive tactics, including paying Apple nearly $20 billion annually to make Google the default search engine on iOS devices, were its undoing. So where does this go from here? Of course Alphabet will appeal, and the court will work to determine penalties ranging from fines to mandates. For example, the company could be forced to divest its Android business. Virtually every non-Apple smartphone -- about 70% of the world's phones -- uses Android software. Owning Android makes it easy for Alphabet to steer most of the world's smartphones to Google. This can all seem scary to investors because Google, which makes money through digital ads, is Alphabet's golden goose. But note a couple of things. First, this process will take time, perhaps multiple years, to finish playing out. There's no reason to panic-sell Alphabet stock. Second, Google probably deserves some benefit of the doubt. Most people who grew up with the internet have never used any search engine besides Google. After all, people don't search for things; they "Google" them. That's some serious brand power. Alphabet has also built an ecosystem around Google, including its popular web browser Chrome, and software like Gmail. The company has aggressively pushed artificial intelligence (AI) features into Google and has massive amounts of user data from years of dominating search. Knocking Google off won't be easy, even if mandates encourage others to try. So, while Alphabet's antitrust loss is noteworthy, let's pump the brakes and see how things play out. Until proven otherwise, Alphabet is one of the world's most dominant companies. Will Healy: Investors may not know what to make of the judgment that Alphabet's Google search engine is a monopoly. The company paid other companies like Apple and Samsung to make it the default search engine on their platforms. Although the government ruled such payments illegal, users don't pay Alphabet directly for using Google Search, leaving some wondering whether the ruling is relevant to the average consumer. Pending the likely appeals and possible punishments, Alphabet's short-term and medium-term prospects have become less clear. This may lead shareholders to sell, or at least not add shares. However, such news may actually be an argument for buying shares slowly; here's why. First, Google is widely perceived as the best search engine. Hence, even if it can no longer pay companies to be the default search engine, investors shouldn't assume that it will lose all or even most of its market share. That share currently stands at 91%, according to StatCounter. Secondly, Alphabet has slowly moved away from relying on revenue from advertising, most of which is driven by Google Search. Advertising has fallen from 87% of revenue in 2017 to 78% in 2023. So, while the judgment could speed the transition away from advertising, relying less on search was the company's plan anyway. Finally, Alphabet's efforts to move outside of search are technically advanced and well-funded. The company has utilized artificial intelligence in some form since 2001. And Google Cloud, its largest non-advertising segment, is the world's third-largest cloud infrastructure provider: Additionally, Alphabet holds $101 billion in liquidity. This means it can spend, and likely has spent, heavily on building these alternative businesses. Indeed, the hardest part for shareholders is waiting through the appeal, to see how any punishment could affect the company should Alphabet lose again. However, between the continued popularity of Google Search and a well-funded move away from its ad business, investors should probably consider adding shares on any significant pullback.

Google's hold on the search industry

It has not been the best of summers for Google. In July, shares in Alphabet -- the search engine's parent company -- dropped after its second-quarter earnings results underwhelmed investors. On Thursday, the Financial Times reported a secret deal that it had made with Meta to target advertisements to teenagers, which skirted its own rules for how minors should be treated online. But, the biggest hit to its business is likely to come from a ruling by a US federal judge, Amit Mehta, who on Monday found that the tech giant had violated antitrust law. The four-year, 286-page case, brought by the US Department of Justice, called Google a "monopolist". It found that the firm spent billions of dollars a year on exclusivity deals with wireless carriers, browser developers and device manufacturers. Tech rival Apple, the iPhone maker, was a significant beneficiary. Google paid the company $20bn in 2022 alone, as part of a years-long agreement to make its search engine the default on Apple's Safari browser. The findings shed light on malpractice in the search industry. Google has long maintained that because its search services are free, and market-leading in quality, its dominance of the sector is not harmful to consumers. While this case concedes some of Google's arguments, it helps establish that Big Tech firms with monopoly power can harm consumers in broader ways. Indeed, Google's billion-dollar deals have helped it to entrench its position as the top search engine. That limits choice, stifles innovation and prevents other companies for gaining scale. Currently, the company controls 90 per cent of the search market, rising to 95 per cent for mobile devices. This traffic underpins its ad-based business model, and drives the data flow to improve its services. Antitrust cases against Big Tech firms often take years and are shrouded in complexity. That makes this case all the more significant. It could set a precedent by emboldening other judges with pending tech lawsuits and by deterring companies from making exclusivity deals. It may also lead to private civil litigation against Google by companies who feel they have been harmed. All said, Alphabet's share price has barely budged since Monday's ruling. It will appeal the case, and the DoJ still needs to discuss remedial actions. One might be to force Google to separate its search engine from its Android phone operating system and Chrome browser. Another is to make Google's search data available for other companies. Both options are quite radical, difficult to execute and perhaps too retrospective. It is better to tackle Google's ability to protect its dominance going forward. A sensible remedy would be to curb its ability to strike exclusive deals. Although that would hit Apple too -- the payments it receives from Google are substantial portion of its $85bn-a-year services business -- it could give the iPhone maker the kick it needs to develop its own search business. Another option would be to ensure users can choose their search engine via a "choice screen" rather than having a default. This is mandated in the EU. It could extend choices to new artificial intelligence-powered search tools too. Ultimately, Google may find that its biggest enemy has been itself, not regulators. Exposed to competition, it perhaps would have innovated more. A recent study found its search results had been throwing up more spam, and low-quality content. The company has also lost ground in the AI race. Perplexity, an AI search app, has recently been surging in popularity. With this landmark case, the door to even faster disruption in the search industry can hopefully be opened wider.