There may be trouble ahead for Alphabet Inc. (GOOGL) stock. The long-standing tech giant, which dominates the global search market, is up against the U.S. Department of Justice (DOJ), which aims to break up specific business units of Google to ensure fair and competitive markets.
All in all, the DOJ is progressing two antitrust lawsuits against Google. The first targets Google’s search engine monopoly, while the other concerns Google’s dominance in the adtech market. Given the severity of the remedies the DOJ may propose in the coming weeks, investors must take a cautious stance toward Google. Despite the attractive growth prospects ahead of the company, I am neutral on Google stock today as I need more clarity about the regulatory risks Google faces before investing in the company.
Alphabet Class A (GOOGL) vs. S&P 500 (SPY)
Alphabet has tracked the S&P lower so far this year, but given its tech-sector presence, the stock has fallen more than the broader market. With the DOJ now actively firing bullets instead of posturing, the risks have steepened towards the downside. Therefore, I’m neutral with a bearish bias.
U.S. DOJ Takes Aim at Google’s Dominance
My cautious stance on Google stems from the adverse effects on the company’s revenue that may arise from the antitrust case. The DOJ argues that Google has “illegally monopolized” the search engine market in the U.S. by using excessive anti-competitive measures such as paying billions of dollars to smartphone manufacturers, including Apple, Inc. (AAPL), to make Google the default search engine on billions of devices. In addition, the DOJ argues that Google is using AI to extend this dominance by promoting zero-click searches with AI-generated answers supported by Gemini and self-preferencing its own services in search results.
The antitrust lawsuit, which was initially filed in 2020, has entered the remedies phase, where the court attempts to find suitable remedies to prevent Google from monopolizing the search engine market further. Some of the proposals of the DOJ may include the divestiture of Chrome browser, divestiture of the Android platform, prohibiting Google from signing exclusivity agreements with smartphone manufacturers to secure the default search engine feature, and requiring API level data sharing with competitors to help them improve their search algorithms with Google’s data to better compete with the market leader.
U.S. Department of Justice Building in Washington, D.C.
In response to these allegations, Google claims that the DOJ’s proposed actions may harm U.S. consumers and the nation’s technological leadership in key areas such as AI. Google executives have confirmed the company’s intention to fight the DOJ’s alleged proposals in court to ensure that the court does not approve of drastic restrictive measures.
Don’t Underestimate the DOJ Threat
My cautious stance on Google is fueled by an understanding of the scope of the Justice Department’s powers. Although there have not been any major company breakups recently, historical precedent suggests that the DOJ can threaten Google’s continued ability to dominate the search engine market.
For instance, in 1911, the DOJ ordered the breakup of Standard Oil, the largest American corporation at the time, into 34 independent companies. Modern-day oil giants such as Exxon Mobil Corporation (XOM) and Chevron Corporation (CVX) were once part of Standard Oil before being broken into several standalone businesses. A more recent example is how the DOJ forced AT&T Inc. (T) to divest its booming local telephone business in 1982 into seven regional businesses to ensure fair play in the telecommunications sector.
Retro Standard Oil gas station along the historic Route 66
Based on the DOJ’s historical actions against companies that were proven to be in violation of antitrust laws, investors should not underestimate the regulatory threat Google faces today. The key difference between now and then is that rumours, sentiment, and perception are more powerful today. Even a small hint of the DOJ enacting its powers could leave GOOGL stock severely oversold based on fear alone.
Google’s Ad Revenue is at Risk
GOOGL remains overly reliant on advertising revenue, which is another reason why I am cautious about investing. In 2024, Google reported advertising revenue of $265 billion, accounting for just over 75% of its total revenue. Within the advertising segment, Google Search brought in $198 billion in revenue, confirming that search advertising is still the most considerable revenue stream for the company.
Suppose the DOJ succeeds in prohibiting Google from securing the default search engine status with smartphone manufacturers such as Apple. In that case, it will allow consumers to manually choose a search engine of their choice, which creates room for Google’s competitors to be in a better position to secure the default search engine status on millions of handheld devices.
Moreover, if the DOJ forces Google to divest Chrome, Google’s tight ecosystem will be disrupted as Chrome serves as a key intermediary connecting users to Google Search. According to StatCounter, Chrome was the dominant web browser globally as of March, with a market share of 66.17%. Safari, in the second place, controlled just 17.59% of the market, underlining Chrome’s dominance.
In addition, the DOJ’s focus on forcing Google to share analytics data with competitors threatens the data advantage Google has enjoyed over its rivals for decades. This could open new doors for competitors to develop products and tools to compete better with Google.
Is Alphabet a Buy, Hold, or Sell?
On Wall Street, GOOGL stock carries a Moderate Buy consensus rating based on 29 Buy, 10 Hold, and zero Sell ratings over the past three months. GOOGL’s average price target of $198.59 implies approximately 22% upside potential over the next twelve months.
Although analyst estimates suggest upside, investors need to carefully monitor the outcome of the antitrust lawsuit against Google. According to Goldman Sachs analyst Eric Sheridan, the remedies phase will end by August this year, leading to a resolution between the DOJ and Google. Even in the best-case scenario, Google will likely be forced to take measures to ensure competitiveness in the search engine market, impacting its ad revenue.
With this risk hanging over Google, the company may not be cheaply valued at a forward P/E of 18. From a historical perspective, Google is attractive today as it has traded at a five-year average P/E of 26. Still, the possibility of a major hit to ad revenue makes Google fairly valued today, which leads to my neutral rating on the company.
Goliath vs. Goliath Tussle Leaves No Winners
Google, the search engine giant, faces a major threat to its ad revenue. The DOJ seeks to end the company’s dominance by potentially breaking it into different business units and depriving it of securing the default search engine status among leading smartphone manufacturers. There is substantial uncertainty about the sustainability of Google’s ad revenue growth, which makes investing in the company a risky bet today. Although Google is highly unlikely to be replaced soon, underestimating the threat posed by the DOJ is not prudent.
