Morgan Stanley looks at turnaround scenarios, EBIT impact and trading range Author: Investing.com

In a note to clients published on Monday, Morgan Stanley analysts analyzed potential scenarios and financial implications arising from the antitrust case conducted by the Department of Justice (DOJ) against Alphabet (NASDAQ:).

The report outlines four possible remedies that could be imposed on Google, each of which would vary in severity and impact on the company’s earnings before interest and tax (EBIT).

Scenario 1:In the least drastic scenario, Google would have to remove exclusivity clauses from its distribution agreements and implement choice screens that allow users to choose their preferred search engine, explains Morgan Stanley.

The Wall Street firm believes this would lead to little change in Google’s business, estimating an EBIT impact of between +15% and -2% by 2028. This is because the analysts believe consumers “will vote based on experience and brand… and the small amounts of lost search revenue would likely be offset by lower TAC payments.”

“European data suggests that GOOGL maintained over 97% of mobile market share even after the introduction of the choice screen in late 2020, which likely underscores the minimal loss in this case. But the judge knows this and wants to change it… which is why we think this is the least likely outcome,” they added.

Scenario 2 and 3:Here, Morgan Stanley outlines more significant changes, including licensed access to Google data, price caps in auctions, and further removal of exclusivity clauses.

Such moves are intended to level the playing field for competitors like Bing and GPT, potentially encouraging them to invest more in search technology. Morgan Stanley expects these scenarios to have a more pronounced impact, with the potential EBIT impact ranging from +13% to -10%.

Scenario 4:The most severe scenario involves restrictions on Google’s ability to make payments to third parties under its distribution agreements, in addition to the other remedies listed in the previous scenarios.

This could enable competitors to outbid Google for default app status on key platforms like iOS, potentially resulting in significant traffic and revenue losses.

“This would likely be the most negative for GOOGL, as it could allow MSFT (and other companies like GPT in the future) to more effectively compete with GOOGL for space and potential exclusivity on iOS,” they note.

Morgan Stanley estimates that this could lead to an EBIT decline of up to 23% by 2028.

Given the uncertainty surrounding the matter, Morgan Stanley expects Google’s valuation multiple to trade in the lower range of 17x to 20x price-to-earnings (PE) multiple, compared to its historical average of 21x. This implies a trading range of $162 to $190 per share for GOOGL stock.

As a result, the company lowered its target price on Google shares from $205 to $190, implying a 16% upside from current levels.