Source: Wall Street See
Author: Li Xiaoyin.

Google's second antitrust trial has begun, increasing the risk of business separation and the stock's relative valuation reaching a record low.

According to related data, Alphabet, the parent company of Google, currently has a 12-month forward P/E ratio of around 17.5, while the overall P/E ratio of the S&P 500 index is about 20.8. Compared to the benchmark index, the stock has a discount of over 3 percentage points, the highest level since 2005.

The reason why Google's stock price has reached an unprecedented low may be due to the market betting on the possibility of Google spinning off its business.

The second antitrust trial has begun, and the risk of Google's business separation is increasing.

In 2020, the US Department of Justice, together with 52 states and jurisdictions' attorneys general, filed a joint lawsuit against Google, accusing Google of paying billions of dollars in marketing fees to companies like Apple and Samsung to ensure that its search engine becomes the default search engine on most smartphones and computers.

After more than four years of trial, on August 5th of this year, the US District Court for the District of Columbia ruled that Google illegally monopolized the online search market, violating US antitrust laws.

Following the loss of the first case, the Google antitrust second case was opened in the U.S. Northern Virginia federal court on Monday, and the antitrust lawsuit threat was shifted to Google's digital advertising field.

If the ruling of the first case ultimately stands, Google is very likely to be forced to divest its Android operating system and Chrome browser platform; while in the second case, the U.S. federal government is seeking to force Google to sell its advertising technology services.

The advertising technology department targeted by the second antitrust case is part of Google's huge advertising business, accounting for about one-tenth of its total revenue. Justin Patterson, an analyst at KeyBanc Capital, estimates that completely divesting from advertising technology could reduce Alphabet's expected earnings per share by 1% to 2% in 2025, which will be a "difficult trial" for Google.

Once the Department of Justice's Google divestiture plan is implemented, Google will become the largest U.S. company divestiture event since the split of the U.S. telecommunications company AT&T in 1984.

The prospects for divestiture are still unclear, and Wall Street remains generally optimistic.

Although over the years, the federal government's threat to suppress Google and its fellow tech giants has been present, it has not had a significant impact on their business momentum or investment appeal.

Currently, Wall Street still holds a relatively positive attitude towards Google, with 78% of analysts rating Alphabet's stock as a buy. Most analysts believe that the likelihood of Google divesting its business is low, and it may be replaced by other punitive measures, such as prohibiting Google from paying high fees to companies like Apple to ensure its default search engine position.

However, analysts' views on the recent regulatory challenges faced by the company have significantly changed:

Mark Mahaney of Evercore ISI expressed a more cautious attitude towards the prospects of Google in a report on Monday, predicting that there will be 'significant uncertainty' in the next 12 months.

Mark Shmulik of Bernstein wrote earlier this month that it is hard to imagine Google coming out of this battle 'unscathed'.

Since June of this year, Alphabet's stock price has fallen nearly 14% in cumulative terms. This decline is particularly significant compared to other major technology stocks, amidst the current market style rotation and growing concerns about the return on AI investment.

Doug Anmuth of JPMorgan stated in a report on September 3rd:

'We believe it is unlikely for Google to continue as-is, and expect that the judge will rule for punitive remedies against Google.'

According to reports, the presiding judge of the Google antitrust lawsuit plans to make a final ruling on remedies in August of next year, and Google is likely to appeal an unfavorable ruling. This case will remain uncertain for a long time.

Editor/Jeffy