Should You Buy Alphabet Stock After Antitrust Defeat? Three Tech Observers Speak Out

Well, it’s official: Alphabet (GOOG 0.95%) (GOOGLE 1.01%)Google’s parent company has lost a landmark antitrust case in federal court.

On August 5, Judge Amit Mehta ruled that Alphabet had illegally stifled competition in the online search market. In his 277-page ruling, Mehta said that “Google is a monopoly and operates like a monopoly to maintain its monopoly.”

What does all this mean for Alphabet and its stock? In this article, three Motley Fool contributors discuss the outlook for Alphabet and how investors should react.

This ruling is a tough outcome, but it has at least one positive side for Alphabet

Jake Lerch: In short, there are two key conclusions to be drawn from the recent antitrust ruling:

1. The ruling poses a problem for Alphabet.
2. However, the disaster is not that serious.

First, let’s consider why this is a problem.

It shouldn’t come as a surprise that losing the case is a negative outcome for the company. After all, Alphabet will have to spend at least more time and money appealing the verdict (which the company has already announced), a process that will likely take several more years.

If Alphabet’s appeals fail, the company will be forced to settle the case or accept the judge’s undisclosed remedies. Neither option is favorable, since it could mean paying tens of billions of dollars in fines and settlements. In addition, the government could seek changes to Alphabet’s business practices. In particular, the government is now in a strong position to seek changes to Google’s search engine—the company’s most profitable business segment.

Overall, the ruling introduces significant uncertainty for Alphabet and its shares.

But there are also good sides.

First, the ruling focuses on Alphabet’s practice of paying other companies to set Google as its default search engine. Applefor example, it received more than $18 billion in 2021 in exchange for making Google the default search engine across all of its products. Alphabet also has deals with SAMSUNG and many other device makers, as well as Mozilla, the non-profit project behind the Firefox browser.

Those deals are now on the chopping block, which in a strange twist of fate could temporarily boost Alphabet’s profits. Because the company won’t be paying device makers like Apple to make its search engine the default, it should save billions of dollars a year. It’s unclear whether Google will lose significant search market share in response, which would hurt profitability.

In any case, there’s no reason to think Google’s dominance in search will end anytime soon. As mentioned earlier, the appeals process will likely take several years. In the meantime, Alphabet will continue to rake in billions of dollars in revenue and profits. So, while this ruling highlights why Alphabet isn’t a stock for every investor, I remain optimistic.

Alphabet’s antitrust loss still leaves competition to beat Google: good luck

Justin Pope: Alphabet’s antitrust loss shouldn’t come as a shock — Google has more than 90% of the global search engine market. After all, the company’s anti-competitive tactics, including paying Apple nearly $20 billion annually to make Google the default search engine on iOS devices led to its undoing.

What’s next?

Alphabet will appeal, of course, and the court will work to determine penalties ranging from fines to injunctions. For example, the company could be forced to divest itself of its Android business. Virtually every non-Apple smartphone—about 70% of the world’s phones—runs Android software. Owning Android makes it easier for Alphabet to funnel most of the world’s smartphones to Google.

This all may seem scary to investors, since Google, which makes its money from digital ads, is Alphabet’s goose of gold. But pay attention to a few things.

First, this process will take time, perhaps many years, to complete. There is no reason to panic sell Alphabet stock.

Second, Google probably deserves some benefit of the doubt. Most people who grew up with the internet never used any search engine other than Google. After all, people don’t search for things; they “Google” them. That’s serious brand power. Alphabet has also built an ecosystem around Google, including its popular Chrome browser and software like Gmail.

The company has been aggressively introducing artificial intelligence (AI) features to Google and has vast amounts of user data from years of dominating search. Overtaking Google won’t be easy, even if mandates encourage others to try.

So while Alphabet’s antitrust loss is noteworthy, let’s step back and see how things play out. Until proven otherwise, Alphabet is one of the most dominant companies in the world.

Despite the ruling, Alphabet could still be a long-term buy

Is Healy: Investors may be unsure what to make of the ruling that Alphabet’s Google search engine is a monopoly. The company has paid other companies, including Apple and Samsung, to make it the default search engine on their platforms. While the government has deemed such payments illegal, users don’t pay Alphabet directly to use Google Search, leaving some to wonder whether the ruling means anything to the average consumer.

In anticipation of likely appeals and possible penalties, Alphabet’s near- and medium-term prospects have become less clear. That could prompt shareholders to sell, or at least not add shares. But news like this could be an argument to buy shares slowly; here’s why.

First, Google is widely viewed as the best search engine. So even though it can no longer pay companies to be the default search engine, investors shouldn’t assume it will lose all or even most of its market share. That share currently stands at 91%, according to StatCounter.

Second, Alphabet has been slowly moving away from its reliance on advertising revenue, most of which comes from Google search. Advertising fell from 87% of revenue in 2017 to 78% in 2023. So while the ruling may accelerate the shift away from advertising, relying less on search was the company’s plan anyway.

Finally, Alphabet’s efforts to expand beyond search are technically advanced and well-funded. The company has been using AI in some form since 2001. And Google Cloud, its largest non-advertising segment, is the world’s third-largest cloud infrastructure provider:

In addition, Alphabet has $101 billion in liquidity. That means it can, and probably has, spent a lot of money building these alternative businesses.

Indeed, the hardest part for shareholders is waiting for the appeal to see how any penalty might affect the company if Alphabet loses again. But between the continued popularity of Google’s search engine and the well-funded exit from its advertising business, investors should probably consider adding shares at any significant pullback.