Alphabet Sags as Cloud Outage, Antitrust Possibility Pressure Shares

Alphabet Inc.  (GOOGL) is off to an inauspicious start to the week as a weekend outage on its cloud and reports of an antitrust suit looming from the Department of Justice add anxiety for shareholders.

Alphabet shares were down more than 3% in trading before Monday's opening bell and were poised to extend a slide of nearly 15% from their late-April highs.

The scrutiny Alphabet faces is likely focused most on the effect that the Google cloud outage wreaked on its customers, bringing one of its strongest growth engines into question.

Crashing Its Customers

During the weekend outage, cloud-reliant companies such as Shopify (SHOP) , Uber (UBER) , Target (TGT) Sony SNE PlayStation Network, Facebook FB Instagram, Snapchat (SNAP) , and more went down alongside Alphabet's myriad of services such as YouTube and Gmail.

The company first acknowledged an issue at 12:25 p.m. ET Sunday, identifying outages only about one hour later.

"We are experiencing high levels of network congestion in the eastern USA, affecting multiple service in Google Cloud, GSuite and YouTube," the company said on Sunday. "Users may see slow performance or intermittent errors."

A source of the issue was not identified and took another four hours to come to a resolution.

"We will conduct an internal investigation of this issue and make appropriate improvements to our systems to help prevent or minimize future recurrence," the company said. "We will provide a detailed report of this incident once we have completed our internal investigation. This detailed report will contain information regarding SLA (service-level agreement) credits."

The results of the investigation will be pivotal as the outage could encourage customers to evaluate alternate cloud options, such as the dominant Microsoft (MSFT) Azure or Amazon (AMZN) AWS cloud products.

The outage also brings congestion issues to the fore as Alphabet touts its Stadia effort, the new gaming service that will rely on the cloud. Given the demands of cloud gaming and the stiff competition, reliability will be a key factor for gaining market share.

DOJ Casts Shadow

While more speculative, the possibility of an antitrust lawsuit against Alphabet by the Department of Justice is potentially more damaging in the long term if it materializes.

The Wall Street Journal reported on Saturday that the Federal Trade Commission (FTC) agreed to give the Justice Department jurisdiction over Google, threatening to bring a heavier hand down on the company's lucrative position in online advertising. The transfer to the DOJ was reported to be a result of the FTC's preference to pursue investigations against Amazon.

The potential regulatory action is a particularly pressing issue as it is a rare point of bipartisan agreement in Congress. For example, U.S. Sen Ted Cruz (R-Texas) as well as presidential candidate and U.S. Elizabeth Warren (D-Mass.) have both suggested a crackdown on the Google parent for its monopolistic practices.

In short, Silicon Valley has few friends among the prominent voices in government, and certainly not in the Oval Office.

Analysts noted the threat to Alphabet and its shares.

"It is hard to quantify implications without further information but this could serve as an overhang on Alphabet shares for some time," Stifel analyst Scott Devitt said.

Devitt said Microsoft's issues with the DOJ throughout the 1990s for monopolistic practices should set a solid precedent for investors to draw upon.

A note to clients explains that due to the tech bubble the immediate impact was not apparent in Microsoft's shares, but resulted in nearly no returns for shareholders from its bubble level in 2012 to the release of its Azure product.

"We don't know how the current environment will play out for consumer Internet leaders but we are confident that Alphabet and Facebook sit clearly in the cross-hairs of hungry regulators," Devitt concluded.

Given the market's sensitivity to bad news at present, the looming threat could cause shares to languish in the immediate future.

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