How We’re Playing Alphabet’s Headline Drama
It’s the ultimate outcome that matters, and that’s a ways away.
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Shares of Alphabet GOOGL are under pressure today following headlines indicating the Justice Department is angling to see the company sell off its Chrome browser, which accounts for roughly two-thirds of the global browser market. It’s also a funnel straight to search through Google, which puts the company in a strong position when it comes to understanding and delivering on search requests. As pointed out in some reports, “Search engines typically improve based on the data they gather from searches conducted by users, in a cycle where success leads to higher quality, which leads to even more success.”
A divestiture of Chrome would also deprive Google of user data that helps it deliver targeted advertisements. The DoJ is also arguing Google should be prohibited from entering exclusionary third-party contracts with browser or phone companies, including Apple AAPL and Samsung SSNLF. The Justice Department’s proposal asks for Google to have to share its search data with competitors.
Let’s remember that these are the DoJ’s recommendations. It will be the outcome of the trial slated to start in April, which will be overseen by U.S. District Judge Amit Mehta, that will matter more. While Mehta has communicated an expected decision by August, odds are high that Alphabet will appeal his decision, which means it will be some time until we have a final decision.
The incoming Trump administration is expected to be more business-friendly and that has raised expectations for a less regulatory-driven environment. Whether the incoming Trump administration could modify the Justice Department's antitrust remedy requests as part of a consent decree is unclear. Near-term we’ll focus on the drivers of Alphabet’s business and its earnings prospects as we continue to weigh the probabilities of various outcomes and their impact on the company and our shares.
As we monitor these developments, we’ll be watching one issue as it relates to Apple. A key part Mehta’s August 2024 ruling was that Alphabet illegally maintained a monopoly over online search services and prevented rivals from developing their own products centered on multibillion-dollar payments Google made to Apple to be the default search engine on iPhones. Court documents showed those payments were $20 billion in 2022 and represent about two-thirds of Apple’s annual R&D spending.
At the time of publication, TheStreet Pro Portfolio was long GOOGL and AAPL.
