Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) faced a significant blow on Aug. 5 when the U.S. Department of Justice (DOJ) accused Google of monopolizing the online search and text advertising markets. The DOJ’s ruling heralded a groundbreaking “win for the American people,” establishing that no company is beyond accountability.
With the path now clear for the DOJ to address Google’s dominance in display advertising, upcoming proceedings on Sept. 9 could even see the tech titan compelled to divest elements like its Android operating system and Chrome browser. Alternatively, the DOJ may mandate data sharing with other platforms and impose stricter regulations on its AI-fueled services.
Image source: Getty Images.
Despite these clouds looming over Alphabet’s horizon, its stock held its ground post-announcement, still boasting a robust 25% rise over the past year. The question now beckons – is it wise to invest in Alphabet before the DOJ’s imminent actions unfold?
Unpacking Alphabet’s Fundamental Landscape
Fathoming Alphabet’s realm is key to gauging its resilience against regulatory headwinds. Google stands at the helm of the world’s search engine domain alongside flagship offerings like YouTube, Gmail, and its mobile OS. It further extends its reach across the third-largest cloud infrastructure (Google Cloud), furnishing a treasure trove of data to fuel its targeted advertising prowess.
Alphabet derived a substantial 76% of its revenue from Google’s ad business in its latest quarter, with Google Cloud contributing 12%, and the remaining 11% from subscriptions and non-ad platforms – all boasting double-digit revenue growth in the first half of 2024.
|
Metric |
Q2 2023 |
Q3 2023 |
Q4 2023 |
Q1 2024 |
Q2 2024 |
|---|---|---|---|---|---|
|
Google Advertising Revenue Growth (YOY) |
3% |
9% |
11% |
13% |
11% |
|
Google Cloud Revenue Growth (YOY) |
28% |
22% |
26% |
28% |
29% |
|
Google Subscriptions, Platforms, and Devices Revenue Growth (YOY) |
24% |
21% |
23% |
18% |
14% |
|
Total Revenue Growth (YOY) |
7% |
11% |
13% |
15% |
14% |
Data source: Alphabet. YOY = Year-over-year.
While Google’s ad business faced headwinds in 2022, recent growth can be attributed to a surge in YouTube ad sales and a stabilizing macro environment. Google Cloud’s expansion, fueled by the burgeoning AI market, witnessed an uptick with the introduction of Gemini AI tools, bolstering its competitive stance amidst giants like Microsoft.
Albeit entrenched in a changing landscape, Google’s subscription arm is on an upward trajectory, securing users within its premium services fold and alleviating dependency on ad-centric revenues.
Evaluating the Regulatory Impact on Alphabet’s Trajectory
Should Alphabet be compelled to shed Android, Google’s bundling strategy could face hurdles in pairing its cloud apps with new devices. Nonetheless, Android’s adaptable nature – customized by players like Samsung and Amazon – suggests a less disruptive impact, preserving Google’s mobile potency.
On the contrary, separating Chrome – a cornerstone of web browsing – could pose graver ramifications, given its extensive market share and data-crafting capabilities for targeted ads.
Imposing data-sharing mandates may erode Google’s moat against rivals and hinder AI advancements, altering the search engine’s evolution amid growing competition from OpenAI.
Insights into Alphabet Investment Amidst Regulatory Uncertainty
Considering the Timing for an Alphabet Investment
On the heels of the DOJ ruling, investors ponder whether now is the opportune moment to delve into Alphabet. While a substantial drop in stock prices failed to materialize post the decision, Alphabet’s stock barely flinched, maintaining an earnings multiple of 21 going forward. This valuation could prove precarious should analysts adjust their forecasts to accommodate unpredictable regulatory environments. It is essential to note that apart from ongoing regulatory tussles in Europe, Alphabet faces antitrust challenges stateside.
With the murky waters of regulatory scrutiny swirling around Alphabet, the prudent choice for investors appears to be a cautious approach. Until the DOJ reveals its subsequent course of action, steering clear of Alphabet may be the prudent path. There’s no shortage of other tech stocks currently exuding allure, and investing in them might appear more prudent than staking a gamble on Alphabet’s capacity to navigate the choppy antitrust waters.
Is Allocating $1,000 to Alphabet Currently Advisable?
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