Alphabet (GOOGL) is in the headlines Tuesday after the Department of Justice filed its antitrust lawsuit against Google. You can read more about the lawsuit at the links here and here, but we want to focus on the stock action right now because we think it is telling the more important story for shareholders.
Shares of Alphabet initially dipped on the news, but shortly after trading began this morning the stock reversed and traded higher at the time this was written. We have a few reasons why we think this happened.
First off, the market was not surprised by this news because a lawsuit has been expected for weeks now and the initial investigation started over a year ago. This was a well telegraphed event that the market saw coming.
Second, this case could be tied up in the courts and take years to resolve, so no immediate change to Alphabet's current practices is required. Alphabet will be given the opportunity to defend themselves and explain how their platforms help small and medium size businesses. What also helps Google's case is how resourceful their products and services are to everyday society free of charge. Google Public Policy said in a tweet this morning that they will provide a full statement on the lawsuit later this morning.
Third, and we think this might be the main reason why GOOGL is higher at the time this was written and why we would not sell GOOGL on this news -- even in the most severe scenario where the DOJ forces Alphabet to break up the business into different units, we think this could potentially be a value-creating event for shareholders. See, we have felt that Alphabet has been chronically complacent in terms of bringing out the most from business lines like YouTube and Google Cloud, while the "Other Bets" division (which contains Waymo and Verily amongst other moonshots) has racked up significant operating losses quarter after quarter after quarter. The business lines have simply been undermanaged, leading to quarterly earnings that have been very inconsistent with some quarters crushing estimates and others missing by wide margin. This is where Alphabet has differed from its FAANG peers who tend to report blowout numbers quarter after quarter. Markets don't like surprises, especially when it comes to earnings, and this could explain why GOOGL always tends to lag and trade at a discount multiple to its group.
But if each of these businesses, plus Search and Android, became a standalone company, we think the new management teams would be better incentivized to delivers stronger, more consistent earnings. Market multiples in line with peers would then be applied to the different business units, creating different valuations when summed together that would be greater than the current Alphabet. Google Cloud would fetch a multiple close to Microsoft's (MSFT) Azure or Amazon (AMZN) Web Services, YouTube could be richly priced considering it is the most watched video platform in the world. Search is a cash cow and investors would live that. Even the lightly talked about Waymo should get an attractive valuation when considering the euphoria surrounding autonomous vehicle technology.
In short, we would not be sellers of GOOGL on this antitrust news because we think there is value trapped within the company. You have heard us say this before: the sum of Alphabet's parts is greater than then the whole and a breakup of the company would be the catalyst event that would unlock that value to shareholders.