Why it matters: Out of the three antitrust cases faced by Alphabet GOOG/GOOGL, the Google Search antitrust case is by far the most important. In that context, we believe that the DOJ’s proposals, if implemented as they are, would have a material impact on Alphabet’s cash engine, Google Search.
- From our vantage point, we think that the DOJ’s proposal contains a set of remedies that are unlikely to be implemented. We believe that even if the ruling by Justice Mehta includes some of these remedies, they are unlikely to be held up in an appeals court.
- From a timeline perspective, we expect the ruling on the antitrust case to come in mid-2025, with Alphabet appealing the decision soon after. The appeals court could take another year or so to release a final judgment, one which we think will be materially different than the DOJ proposal.
The bottom line: We are maintaining our $220 fair value estimate for wide-moat Alphabet and continue to view the name as materially undervalued. While we understand investor caution around the headline risk associated with the name, we believe it is attractively priced for long-term investors.
- With shares down 5%, we believe investors are also overestimating how much of the DOJ proposal will feature in remedies imposed on Alphabet after the appeals court decision, which will come in 2026 at the earliest.
Morningstar Metrics for Alphabet
- Fair Value Estimate: $220.00
- Morningstar Rating: 4 stars
- Economic Moat: Wide
- Morningstar Uncertainty Rating: Medium
Who Would Buy Chrome?
We believe parts of the DOJ proposal are highly unlikely to be implemented. Take Chrome’s divestiture. If Alphabet is forced to sell the internet browser, we don’t believe there is an obvious purchaser. Companies like Meta, Amazon, and OpenAI would love to buy a scaled-up, highly successful browser like Chrome. At the same time, there is a strong argument to be made that the results of any such buy-out would be equally anti-competitive.
Like Mozilla Firefox, Chrome could also be spun off as a stand-alone company. However, the issue with a spinoff is that more than 75% of Firefox’s operating budget comes from its revenue share agreement with Alphabet. As an independent third-party browser, Chrome would likely be in a similar position, completely leveraged to search revenue sharing from larger search engines like Bing. It is also worth noting that Alphabet won’t be able to have an RSA with an independent Chrome, likely materially affecting its cash generation and ability to invest in areas such as product development, security, and so on.
As part of its proposal, the DOJ wants Alphabet to share search query data with rivals and potential rivals by allowing them access to its search index at a marginal cost. Along with the search index, Alphabet would have to provide the user and the advertiser data to its competitors for 10 years. In the current search market, only two search engines crawl the web: Google Search and Microsoft Bing. New startups have stayed away from this space as building a viable search engine that can compete with Google is a multi-billion-dollar expense, with revenue on the backend of this investment far from guaranteed. By forcing Google to make data from its search indexes, feeds, and models available to a tech behemoth such as Microsoft, we believe the DOJ risks illegally picking winners and losers in the search market.
Will Apple and Samsung Migrate to Bing?
On a similar note, the DOJ’s proposal would essentially prohibit Alphabet from pursuing RSAs while not explicitly preventing other search engines from setting them up. If this proposal is implemented, large companies like Apple and Samsung, which have historically benefited from the search exclusivity agreements, would simply migrate to an RSA with Bing, the only other at-scale internet browser. We think there is a solid antitrust argument to be made about limiting the exclusivity of any search agreements that Alphabet has, but to prohibit revenue-sharing for only Google Search appears excessive and unlikely to be included in the final judgment.
We find the prohibition of the RSAs entirely odd, given Justice Mehta’s Aug. 5 judgment, in which he took issue with exclusivity clauses and not their nature as revenue-sharing agreements. On properties/devices owned by Alphabet, the DOJ proposed that consumers be provided a choice screen on which they can pick Google among other search engines.
To promote customer choice and education about alternative search engines, the DOJ proposal includes Alphabet funding a program that would potentially provide individuals incentive payments to pick a non-Google default on a choice screen. Again, forcing a company to pay users to use its competitors' products will likely be dismissed on appeal as overly punitive, especially when the primary competitor in the space is another multi-trillion-dollar company, Microsoft.
Finally, Alphabet’s investments in AI companies, such as Anthropic, could also face further scrutiny. The DOJ proposal would forbid Alphabet from having any investment in a query-based AI product. Again, we think that such a restriction, when only placed on Alphabet while its Big Tech peers are free to invest in artificial intelligence companies, is odd.
Alphabet (GOOG) Share Price
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
