To The Moon

$Alphabet(GOOG)$ Given the increasing antitrust pressure on Big Tech, I’ve conducted a analysis using Google as a case study to explore what shareholders might expect if the company were broken up.

The Push for a Google Breakup

The call to break up Big Tech has gained momentum over recent years, particularly since 2021 when Lina Khan became FTC Commissioner. While the incoming administration may not share the same aggressive stance as the current one, examining a potential Google breakup provides valuable insight for investors.

Among major tech companies, Google appears to be the furthest along in facing these challenges. Recently, the U.S. Department of Justice (DOJ) proposed a breakup of Google to address its alleged monopolistic practices in search and advertising. The DOJ is urging a federal judge to mandate the sale of Google’s Chrome browser, arguing that its integration with search has entrenched Google's dominance. Proposed remedies also include limiting Google’s control over the Android operating system and its AI technologies to curb anti-competitive practices.

Google’s Defense

As expected, Google intends to contest this proposal. According to an antitrust expert, Google is likely to argue on appeal that the court’s decision is inconsistent, as it recognizes Google’s dominance in search as a product of innovation—a factor that typically justifies monopoly status under U.S. antitrust law.

However, the expert notes that the court might reference the 2001 Microsoft case, where the remedies were criticized as inadequate. This precedent could influence a more stringent outcome for Google, such as the forced divestiture of Chrome or the separation of Android from Google’s control.

This analysis highlights the potential implications for shareholders as regulatory scrutiny intensifies, offering a glimpse into the financial and structural impact of a possible breakup.

Google's main business segments

This chart provides a clear breakdown of Google's business units and their respective contributions to revenue. The primary units we’ll evaluate for valuation purposes include:

The key Google business units for valuation are:

• Google Search & Network: Largest revenue contributor, over 65% of total revenue.

• YouTube (Ads + Subscriptions)

• Other Subscriptions and Services: Includes Gmail, Chrome, Android, and Google Maps.

• Google Cloud: Covers Google Cloud Platform (GCP) and Google Workspace.

• Other Bets: Focused on the most mature and valuable units, Waymo (autonomous vehicles) and DeepMind (AI).

Search & Network

Search is grappling with the classic innovator's dilemma. To stay competitive, it must evolve into an AI-driven search engine, even if that means cannibalizing its current model.

While Google has the potential to lead in AI search, its dominance is being challenged by alternatives such as ChatGPT, which has achieved a level of brand ubiquity similar to Google itself. Additionally, the rise of Large Language Models (LLMs) is enabling new features and products, further intensifying competition. Nevertheless, this doesn’t diminish the standalone value of Google Search as a business.

Competitors in E-Commerce Search

Despite Google maintaining a strong position in monetizable searches, especially within e-commerce, it faces increasing competition. Amazon is a formidable rival as a starting point for shoppers’ online journeys. Emerging trends, such as the integration of LLMs into social platforms and tools like ChatGPT, are also shifting how users approach online search.

Before estimating its valuation, we’ll review the latest data on Google Search and its position within this evolving landscape.

Morgan Stanley highlighted that younger audiences are increasingly using social media platforms like Meta and TikTok, along with GPT-based tools, at the top of the e-commerce search funnel. Additionally, with most young adults in the U.S. favoring the iOS ecosystem over Android, Google's influence on this demographic is further diminished.

While Google Search remains dominant in advertising verticals such as online travel, healthcare, automotive, and finance, challenges are emerging. For example, Booking Holdings, one of Google’s largest clients in the travel sector, recently noted during an earnings call that social media platforms have become significantly more effective for their needs.

The findings from a recent teen survey on the usage of GenAI products are particularly intriguing. Teens are engaging with chatbots and AI-supported search at similar rates to their parents.

However, the data reveals that both teenagers and their parents primarily use GenAI search for non-monetizable Google queries.

Challenges & Risk

To grasp the ongoing disruption in search, it’s crucial to start by examining unmonetizable queries, as they reveal shifting user behaviors and the formation of new habits. Over time, these habits will likely extend to monetizable queries, such as shopping. Meanwhile, AI search and chatbot providers are beginning to launch shopping-related features, as seen recently with Perplexity Shopping. This makes current data on shopping intent searches less indicative of long-term trends; a clearer picture will emerge in about a year.

Despite these shifts, Google Search and Network generated $222 billion in trailing twelve-month (TTM) revenue. While Network revenue has been flat, Search grew by 12% year-over-year in the latest quarter. With Google's overall net income margin at 27.7% (TTM)—and considering that some units like GCP are less profitable or unprofitable—it’s reasonable to estimate that Search’s net income margin is at least 27.7%. This translates to approximately $61.5 billion in net income from Search and Network.

However, two significant risks loom over Search. First is the potential for disruption or cannibalization as shifting consumer behavior accelerates, potentially eroding profits. Second is the increasing likelihood of Google losing its default Safari search deal with Apple. While this might not have been a critical issue before 2022—when most consumers would likely have chosen Google as their default search engine—emerging LLM-based alternatives like ChatGPT and Perplexity make this a less certain outcome. If these risks materialize, Google’s search profits could face substantial declines.

Taking these factors into account, I estimate a fair valuation multiple of 13x P/E for Search as a standalone business, leading to a valuation of approximately $800 billion.

YouTube & services

YouTube stands as one of Google's most valuable assets. Despite already being one of the world’s most heavily used digital platforms, it appears poised to maintain its dominance, particularly among young adults and teenagers who use YouTube daily.

In the last 12 months, YouTube generated $34.8 billion in ad revenue and also contributed significantly to Google’s $39.5 billion (TTM) service and subscription revenue, thanks to YouTube Premium, its ad-free tier. With YouTube announcing in early 2024 that it surpassed 100 million subscribers globally, we can estimate the average subscription price at around $10 (taking into account different pricing for family, student, and regional discounts). This means YouTube Premium likely generates between $12 billion and $15 billion annually, with a reasonable estimate around $13 billion. Combined with YouTube’s ad revenue, this brings total revenue (TTM) to approximately $48 billion.

When we look at peer valuations from Meta and Netflix, both trade at a 9-10x price-to-sales (P/S) ratio. However, YouTube’s net income margin is expected to be lower, as its ad revenue is split 45% to YouTube and 55% to content creators, compared to Meta’s 80% gross profit margin. Netflix, with a 45% margin, seems to have a similar profile to YouTube, and its net income margin of 15-20% could be comparable to YouTube’s. Taking the midpoint, YouTube’s net income would be around $8 billion. Given the market conditions, a P/E ratio of 35x seems reasonable for YouTube, suggesting an estimated stand-alone value of $280 billion.

In addition, Google’s other services—including Chrome, Android, Maps, and others—generate around $26.5 billion in revenue. These services are interdependent, making it difficult to break them down individually. For example, Chrome benefits greatly from being the default browser on Android devices, while Maps and Chrome benefit from being pre-installed on Android. Therefore, keeping these services together is key to maximizing their value. If these were valued separately, it would be nearly impossible with the available data.

Treating this group as a whole, a more appropriate net income margin would be similar to that of Google Search, since these products generally have lower costs than YouTube. Applying a 25% net income margin to this segment would result in around $6.6 billion in profits. Given that this segment is growing at a rate of 10-20%, and that YouTube Premium was the fastest-growing part, I estimate a 10% growth rate for these services (excluding YouTube Premium). This aligns with data showing that mobile ad spending grew 7.7% YoY in 2023, with Android contributing significantly. A 20x P/E ratio for a 10% growth rate seems reasonable, giving this segment an estimated value of $132 billion.

It's important to note that when discussing "pure cloud" revenue, the only truly comparable data point is Amazon's AWS, as they report only AWS revenue. In contrast, both Google and Microsoft include other cloud services, such as Google Workspace, in their cloud revenue figures, which makes direct comparisons more complex.

Looking at Google Cloud as a whole, it currently generates over $40 billion in TTM revenue. The segment has also experienced recent acceleration, driven by the growing demand for AI workloads. In the most recent quarter, Google Cloud reported a 35% year-over-year revenue growth.

The period of 2022-2023, when clients were focused on optimizing their cloud spending, is now behind us. Growth is reaccelerating, and it’s happening at a much larger revenue run rate.

summary

My projected valuations for Google's individual business segments are as follows:

• Search & Network: $800B

• YouTube: $280B

• Other Services (Chrome, Android, Maps, etc.): $132B

• Google Cloud: $607B

• DeepMind: $40B

• Waymo: $40B

• Net Cash: $41.5B

Total: $1.94 Trillion

This estimated valuation of $1.94 trillion is close to Google's current market cap of $2.08 trillion.