Should You Buy Alphabet Stock Following Its Antitrust Defeat? 3 Tech Watchers Weigh In.

Well, it’s official: Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), the parent company of Google, has lost a landmark antitrust lawsuit in Federal court.

On Aug. 5, Judge Amit Mehta ruled that Alphabet has illegally stifled competition in the online search market. In his 277-page ruling, Mehta concluded, “Google is a monopolist, and it has acted as one to maintain its monopoly.”

So, what does this all mean for Alphabet and its stock? In this article, three Motley Fool contributors discuss Alphabet’s prospects and how investors should react.

This ruling is a difficult outcome, with at least one silver lining for Alphabet

Jake Lerch: In a nutshell, there are two key takeaways from the recent antitrust ruling:

1. This ruling is a problem for Alphabet.

2. However, it’s far from catastrophic.

First, let’s examine why it’s a problem.

It should come as no surprise that losing the case is a negative outcome for the company. After all, at the very least, Alphabet will have to spend more time and money appealing the ruling (which the company has already announced it will do). That process will likely drag out for several more years.

However, if Alphabet’s appeals fail, the company will be forced to settle the lawsuit or accept the judge’s yet-to-be-revealed remedies. Neither of those options is favorable, as they could mean paying tens of billions of dollars in fines and legal settlements. In addition, the government could seek changes to Alphabet’s business practices. Specifically, the government now finds itself in a powerful position to demand alterations to Google Search — which is the company’s most lucrative business segment.

All in all, this ruling introduces significant uncertainty to Alphabet and its stock.

Yet there are silver linings.

For one thing, the ruling focuses on Alphabet’s practice of paying other companies to make Google Search their default search engine. Apple, for example, received over $18 billion in 2021 in exchange for making Google the default search engine across its products. Alphabet also has deals with Samsung and numerous other device makers, and Mozilla, the nonprofit project behind Firefox.

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

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In any event, there’s no reason to believe that Google’s search dominance will end quickly. As noted earlier, the appeals process will likely drag out for several years. In the meantime, Alphabet will continue to rack up billions in revenue and profits. So, while this ruling highlights why Alphabet isn’t a stock for every investor, I remain bullish on it.

Alphabet’s antitrust loss still means competition has to beat Google: Good luck

Justin Pope: Alphabet’s loss in the antitrust lawsuit shouldn’t be a shock — Google has over 90% market share of internet search worldwide. Ultimately, the company’s anticompetitive tactics, including paying Apple nearly $20 billion annually to make Google the default search engine on iOS devices, were its undoing.

So where does this go from here?

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

This can all seem scary to investors because Google, which makes money through digital ads, is Alphabet’s golden goose. But note a couple of things.

First, this process will take time, perhaps multiple years, to finish playing out. There’s no reason to panic-sell Alphabet stock.

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

The company has aggressively pushed artificial intelligence (AI) features into Google and has massive amounts of user data from years of dominating search. Knocking Google off won’t be easy, even if mandates encourage others to try.

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

Alphabet may still be a long-term buy despite the ruling

Will Healy: Investors may not know what to make of the judgment that Alphabet’s Google search engine is a monopoly. The company paid other companies like Apple and Samsung to make it the default search engine on their platforms. Although the government ruled such payments illegal, users don’t pay Alphabet directly for using Google Search, leaving some wondering whether the ruling is relevant to the average consumer.

Pending the likely appeals and possible punishments, Alphabet’s short-term and medium-term prospects have become less clear. This may lead shareholders to sell, or at least not add shares. However, such news may actually be an argument for buying shares slowly; here’s why.

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

Secondly, Alphabet has slowly moved away from relying on revenue from advertising, most of which is driven by Google Search. Advertising has fallen from 87% of revenue in 2017 to 78% in 2023. So, while the judgment could speed the transition away from advertising, relying less on search was the company’s plan anyway.

Finally, Alphabet’s efforts to move outside of search are technically advanced and well-funded. The company has utilized artificial intelligence in some form since 2001. And Google Cloud, its largest non-advertising segment, is the world’s third-largest cloud infrastructure provider:

Image source: Statista.

Additionally, Alphabet holds $101 billion in liquidity. This means it can spend, and likely has spent, heavily on building these alternative businesses.

Indeed, the hardest part for shareholders is waiting through the appeal, to see how any punishment could affect the company should Alphabet lose again. However, between the continued popularity of Google Search and a well-funded move away from its ad business, investors should probably consider adding shares on any significant pullback.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jake Lerch has positions in Alphabet. Justin Pope has no position in any of the stocks mentioned. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Apple. The Motley Fool has a disclosure policy.

Should You Buy Alphabet Stock Following Its Antitrust Defeat? 3 Tech Watchers Weigh In. was originally published by The Motley Fool