Surprise Upsides to GOOG “maybe” Breakup !
I am certain by now, everyone is aware of the antitrust law suit brought upon Google by US’s Justice Department (DOJ).
The Justice Department has suggested a breakup of $Alphabet(GOOG)$’s Google as a potential way to address its de facto “Search” monopoly.
Alphabet is fighting back against the prospect, of course.
However, should it take place, investors should not be all that upset.
According to Alphabet’s VP (Regulatory affairs) - Lee-Anne Mulholland:
The government seems to be pursuing a sweeping agenda that will impact numerous industries & products, with significant unintended consequences for consumers, businesses, and American competitiveness.
To call it a big deal would be an understatement.
A breakup of a monopoly has not happened since $AT&T Inc(T)$’s split into pieces in the 1980s.
DOJ has until 20 Nov 2024 to decide on what specific remedy it is seeking.
US District Judge Amit Mehta, who ruled in August that Google has a monopoly in search, is expected to rule next year on what action should be taken.
Google is the core of Alphabet’s business, so as a ruling approaches, investors should “know” what the rest of Alphabet’s businesses could be worth and if the company could be more valuable in pieces.
As Oakmark Select mutual fund, Portfolio manager, Bill Nygren has noted:
At the moment, nobody has to value to try to put a value of Waymo,
Nobody has to try to separate YouTube versus Google search.
Doing so, he thinks would lead to a higher stock price.”
How So ?
Principal of Valuation Analysis.
Nygren is talking about a sum-of-the-parts (SOTP), Valuation Analysis, that attempts to assess the worth of each part of a business separately.
It is a way to check and see if there is any hidden value inside any company.
The process often relies on valuation multiples from companies that do part of what the larger business does as a way to isolate what a specific operation is worth.
Alphabet, the parent company.
As of 9 Oct 2024, Alphabet is valued at about $2 trillion, cash and debt included.
Over the past 12 months, it has generated about (a) $328 billion in sales and (b) $135 billion in earnings before interest, taxes, depreciation, and amortization (Ebitda).
Sales and profits are expected to grow about +11% & +17%, respectively in the coming 12 months.
Search-related services account for roughly 70% of sales.
YouTube-related services account for another 20%.
With about 10% coming from Alphabet’s cloud business.
Given that breakdown, figuring out how to value those assets is the next step.
Value Inference.
For Google “cloud services”, investors can look at multiples cloud leaders eg. $Microsoft(MSFT)$ and $Amazon.com(AMZN)$.
According to FactSet, Microsoft and Amazon trade for an average of about 21x Ebitda.
This makes Google Cloud worth about $300 billion.
For online entertainment, $Netflix(NFLX)$ and $Meta Platforms, Inc.(META)$ could be considered similar to YouTube.
Meta and Netflix trade for an average of about 17x Ebitda.
This implies YouTube’s valuation to be about $450 billion.
As for Google, that is essentially “Search”, might need to come up with “self defined” valuation for that one.
For Google search, investors might use a multiple like Apple(AAPL)$.
A number like that for the overall market.
Or maybe even something lower, factoring that Google could be disrupted by artificial intelligence.
Alphabet, of course, has its own AI investments, including its own chips used for AI computing.
So, objectively using a market multiple of roughly 17x Ebitda for “Search” yields a valuation of about $1.6 trillion.
Investors should also consider Alphabet’s “other bets” which are business incubating inside the company at various stages of development.
One important example is the potential of self-driving robotaxi company Waymo. (see above)
To value that, investors have to look at Tesla (TSLA)$.
Street valuations for Tesla’s self-driving business range from $100 billion to trillions.
The range is wide, with an average of roughly $600 billion, even though the company has yet to complete a single fully autonomous ride.
Tesla’s advanced driver-assistance products can “supposedly” do most of the driving but require the person behind the wheel to pay attention.
Alphabet’s Waymo, meanwhile, completes 100,000 self-driving cab rides each month, making it a 100% real self-driving player.
While it does not make much money (yet) today, it is reasonable to value it at $300 billion.
If we tally up each component-company, all that adds up to about $2.6 trillion.
That is roughly +30% more than where Alphabet trades today.
More importantly, it implies a stock price north of $210 a share (fyi.. GOOG$ shares were at about $163.06 a share {as of Wed, 09 Oct 2024 closing}.
Analysis.
Part of the reason the SOTP numbers look so attractive is that through Thursday trading, Alphabet shares were down about -14% over the past 3 months.
It could be interpreted as a sign that investors are indeed worried about antitrust problems.
As such, Google shares are trading for about 18x Ebitda, a discount to most of its peers.
Conclusion.
SOTP valuations do not prove anything.
They also do not mean stocks will rally on a valuation revelation.
It is just one more way to assess the opportunity and risk of an IT giant like Google.
My viewpoints: (mine only)
Doing business in this century modern world is vastly different from the past.
How qualified is the prosecutor in Google’s antitrust lawsuit when it comes to running a business, steep in technology and operating it with profits?
Often, what is “ideal” will not be able to survive in the real-world, leading to degradation of services rendered or worst succumbing to smart scammers.
Case in point, the latest injunction by US court imposed in the Google vs Epic Games monopoly lawsuit. (see above)
If Epic Games think that Google is such monopoly, they should peddle their app elsewhere and with many payment options available eg. Amazon Appstore, F-Droid, Unity Game engine, React Native etc…. .
Instead, they choose to sue, with a clear understanding that Google Playstore :
Is the “safest” software app platform in the market, where Epic Games choose to remain under.
Provide app developers, the biggest market exposure to global users instead of just US domestic.
Strangely enough, the court decided to persecute Google with a list of restrictions while expecting the tech giant to remain a ‘good” citizen. Short-sightedness perhaps or a lack of finesse in the US court?
Is the above antitrust lawsuit by the Department of Justice going to trod down the same path ?
Is there room for recourse, for the common citizens to sue the US high court if its decisions on Google leads to the proliferation of scam wares as a result of rules relaxation ?
The court like any institution needs to be held accountable for every verdict it dishes out - right or otherwise. It is only fair, no?
Actually, the US court can learn from a real example that shows what might happen if they take this action.
Look at how China treated its big tech companies like Alibaba and Tencent.
After the government punished them harshly, these companies somehow lost their “drive & spirit” and cannot get back to where they were before.
Does the US court want the same thing to befall on Google?
If they break up Google, it might not be able to compete well with other countries' tech giants anymore, further eroding US’s #1 status on the global stage.
Hope the court is not foolish. “Big is still beautiful” due to the synergy that could be had or generated.
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