Should You Invest in Alphabet Ahead of the DOJ’s Next Moves? | The Motley Fool

Alphabet (GOOG 1.63%) (GOOGL 1.65%) suffered a major setback on Aug. 5 after the U.S. Department of Justice (DOJ) ruled that Google had illegally monopolized the online search and text advertising markets. In a statement, Attorney General Merrick Garland called the antitrust victory a “historic win for the American people” which showed that “no company — no matter how large or influential — is above the law”.

That ruling clears the way for another trial, in which the DOJ will directly target Google’s dominance of the display advertising market, on Sept. 9. Several recent reports suggest the DOJ could push for a breakup of the tech giant through the divestments of its Android operating system and Chrome web browser, or force Google to share more of its data with other advertising platforms while introducing tighter restrictions for its AI-driven services.

That uncertainty has cast a dark cloud over Alphabet’s future, but its stock held steady after the news and remains up nearly 25% over the past 12 months. Should investors still buy Alphabet’s stock before the DOJ makes its next moves?

A look at Alphabet’s strengths and weaknesses

To evaluate the regulatory risks, we need to understand Alphabet’s business. Alphabet’s Google owns the world’s leading search engine, streaming video platform (YouTube), webmail platform (Gmail), mobile operating system, and web browser. It also owns the world’s third largest cloud infrastructure platform (Google Cloud). That sprawling ecosystem gives Google plenty of data on which to base its targeted ads.

Alphabet generated 76% of its revenue from Google’s advertising business (its search and display ads, advertising network, and YouTube) in its latest quarter. Another 12% came from the Google Cloud platform, while 11% came from its paid subscriptions, non-advertising platforms, and hardware devices. All three of those core businesses grew their revenues at double-digit rates in the first half of 2024.

Data source: Alphabet. YOY = Year-over-year.

Google’s advertising business cooled off in 2022 as it faced tough macro headwinds and intense competition from other platforms like ByteDance’s TikTok and Meta Platforms‘ (META -0.23%) Facebook and Instagram. But its ad revenue grew again over the past year as YouTube’s ad sales rose and the macro environment stabilized.

Google Cloud’s growth also accelerated as the rapid expansion of the generative AI market drove more companies to upgrade their cloud infrastructure. Google’s rollout of its new Gemini AI tools amplified that growth — even though its AI efforts generally didn’t attract as much attention as Microsoft‘s (MSFT 0.01%) partnership with OpenAI.

Google’s subscription business also continues to expand as it locks more users into its YouTube Premium, YouTube Music, and Google One plans. That expansion could gradually reduce its dependence on macro-sensitive ads.

How could the DOJ impact Alphabet’s growth prospects?

If the DOJ forces Alphabet to divest Android, it could become harder for Google to bundle its first-party cloud apps with new smartphones and tablets. However, Android is already an open-source OS that has already been modified by other companies like Samsung and Amazon (AMZN 0.12%) for their own devices. Microsoft even partnered with Samsung and other smartphone makers in the past to pre-install its own cloud apps instead of Google’s apps on their latest devices.

Therefore, Android is really just a customized launchpad for Google to generate revenue from the Play Store and its other cloud-based apps. So as long as consumers still voluntarily install those apps on their Android-powered devices, its mobile growth strategy will remain largely intact — even if Google has to spin off Android into a separate company.

Cutting Google off from Chrome would likely cause more damage. Chrome accounts for nearly two-thirds of the web browser market, according to StatCounter, and the company collects data on its users (unless they opt out) to craft targeted ads.

Forcing Google to share its first-party data with other advertising platforms would also generate headwinds by narrowing its moat against ByteDance, Meta, and other advertising giants. Limiting the data it can gather for its generative AI services could further disrupt the evolution of its own search engine as OpenAI expands its new SearchGPT engine.

Is it the right time to invest in Alphabet?

If the DOJ ruling had triggered a steep sell-off and crushed Alphabet’s valuations, I’d consider nibbling on it as a contrarian play. But its stock barely budged after the ruling and still trades at 21 times forward earnings — and that valuation could rise if analysts rein in their expectations to account for the unpredictable regulatory threats. Investors should also remember that Alphabet faces other ongoing regulatory challenges in Europe in addition to its antitrust trials in the U.S.

So for now, I’d avoid Alphabet until the DOJ makes its next moves. There are plenty of other attractive tech stocks to buy right now — and I’d rather own them than roll the dice on Alphabet’s ability to weather the antitrust headwinds.