Alphabet Remains a Buying Opportunity

🔵 Alphabet Inc., aka "Google" (NASDAQ:GOOG) (NASDAQ:GOOGL) finds itself at a critical juncture. In my last take, I was bullish on Alphabet, and the stock's performance proves it. Nevertheless, AI's impact on Google has been mixed, and the stock looks like a wild rollercoaster ride.

📊 Alphabet 1-year Performance

Alphabet plummeted by approximately 33% before striking "liberation day." Since the infamous April 7th nadir, many stellar stocks have soared a whopping 50-100% or more. Yet, Alphabet's stock has only inched up by about 25% and is still 18% below its all-time high (ATH).

Moreover, despite crushing recent earnings estimates, the stock trades at just 18 times this year's expected earnings per share (EPS), remarkably cheap for such a dominant market powerhouse. But why is this the case, you may wonder?

Alphabet leads the AI revolution, yet AI assistants like ChatGPT, Grok, and others pose threats to Google's core search business. However, Google also possesses a robust AI agent, Gemini, seamlessly integrated with Google search. I reckon the perils to Google's search business are overblown in this regard. Nonetheless, antitrust cases claiming Google operates a "illegal monopoly," and the potential forced divestment of Chrome, are significant concerns.

Alphabet Is Too Cheap, But There's a Catch

It's clear: Alphabet does not deserve to trade at a mere 17 forward price-to-earnings (P/E) ratio. In my opinion, a P/E ratio of around 25 is a more fitting valuation for Google's shares. However, the regulatory overhang casts a shadow over the stock.

Even though Google handily outperformed recent earnings expectations, investors seem unconvinced, leading us to this unusual situation.

A ruling on potential remedies from U.S. District Judge Amit Mehta is pending "by August." Accordingly, the DOJ also seeks to:

End Google's partnership with Apple, sharing proprietary search data.
Ban new browser, search investments for 5-10 years.

Some analysts like Ross Sandler at Barclays believe that forced Google Chrome divestment could trigger a "black swan event," possibly causing Alphabet's stock to drop by around 20% and potentially slashing EPS potential by 30%.

The Government Might Be Overstepping

Is the world bellering toward communism? I recognize the "monopoly" argument, but I believe compulsory divestment of Chrome is unnecessary. After all, Chrome is an integral cog in Alphabet's business model. Forcing Google to divest might create turmoil for Chrome users globally and the whole tech industry.

Personally, among various browsers, I prefer Safari, but I use Chrome due to Safari's limited application support, aside from rare cases where I opt for Firefox. Historically, I only used Firefox but have since almost exclusively relied on Chrome.

Globally, Chromerules with a staggering 67%browser share. Safari trails second, with nearly 17%. Microsoft's Edge juggles less than 5%, and the rest, barely. It's unfortunate for Microsoft and other competitors, but Google reigns supreme in this market, and I don't see an issue with that.

Approximately 3.45 billionindividuals worldwide use Chrome, encompassing over 60% of internet users globally. Imagine if a divestment actually occurred? This isn't like splitting up an oil company from a century ago.

A divestment would adversely affect Google's integrated services. Not only would this harm Google's revenue model, but it would also harmuser experience significantly and possibly jeopardize privacy and security.

The Potential Fallout of Forced Divestment

Breaking up Alphabet is essentially the equivalent of opening Pandora’s box. Chromefeels like a central component of the internet. Who would manage Chrome in that scenario? Will the government become a browser developer? No, of course not.

In my honest opinion, no company can effectively manage Chrome better than Google. A divestment could very well signal the demise or significant decline of one of the internet's most widely used browsers.

If the government forces Google to divest, it could be responsible for potentially obliterating Chrome, one of the internet's best products. I'm not sure the government is willing or prepared for this responsibility or outcome.

Conclusion

The DOJ's approach appears more determined than usual, implying the "usual" slap-on-the-wrist won't suffice. However, forcing Chrome divestment may be too extreme, potentially causing damage not only to Alphabet and its shareholders, but also to billions of users worldwide.

Therefore, I anticipate structural and behavioral remedies that likely stop short of ordering a divestment of Chrome. Worst-case scenario, Judge Mehta might impose such a dramatic step, but this is still a low-probability scenario (around 20% chance in my view).

A divestment also requires a lengthy process, potentially taking years before Alphabet would be required to comply. This timeline implies that Alphabet's financial performance may not be significantly impacted for several years, even in the worst-case situation.

As the situation unfolds, the stock remains a bargain with solid upside potential. Buy Alphabet's stock at current levels for substantial gains over the next 12 months. My 12-month price target for Alphabet is $225, representing approximately 28% upside potential.

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The government's potential forced divestment of Google's Chrome browser could have significant ramifications for both Alphabet's stock and internet users worldwide, as Chrome currently controls approximately 67% of the global browser market.
Investors might be holding off on investing in Alphabet due to uncertainty surrounding antitrust cases and potential regulatory action, such as the forced divestment of Chrome, which some analysts predict could trigger a "black swan event" and drop Alphabet's stock by around 20%.
In the realm of personal-finance, considering Alphabet's current cheap valuation and potential upside, along with the government's probability of imposing structural and behavioral remedies instead of a forced divestment of Chrome, it may be a wise choice for individuals to invest in Alphabet's stock for substantial gains over the next 12 months.