A U.S. federal judge has ruled that Google, owned by Alphabet (NASDAQ: GOOGL), has violated Section 2 of the Sherman Act, indicating that the company has unfairly acted to maintain a monopoly.
The heart of the government’s antitrust case centered on exclusive deals the company struck with smartphone makers such as Apple (NASDAQ: AAPL) and Samsung to be the default search engine of their mobile devices. These deals have become quite large over the years. For example, Google has a reported $8 billion, four-year deal with Samsung, while a revenue-sharing deal with Apple is believed to be worth over $20 billion a year. In 2021, Alphabet paid over $26 billion to provide the default search engine on various smartphones and web browsers.
The questions for investors are: What is happening now, and how will this impact Alphabet stock in the future?
The Transition Away from Exclusive Search Deals
Alphabet undoubtedly will appeal the ruling, while a separate ruling to determine penalties will also need to take place. This will take some time to play out.
First and foremost, the ruling could mean the end of exclusive search deals where Google will automatically become the default search browser for mobile devices. Instead, users could be given a choice of which search engine to use when they set up their mobile devices.
There has been talk of simply adding a “choice screen” to the device’s initial setup process, allowing users to switch their default engines from Google to another search engine. In the most severe case, the company could be broken up, but that seems unlikely.
Ironically, Microsoft (NASDAQ: MSFT) was a primary witness in the case, although it certainly had deep-enough pockets to try and strike its own exclusive search deals. Microsoft, meanwhile, was found guilty of its own antitrust practices back in 2000. The government case against this company largely stemmed from bundling its Windows operating system with the Internet Explorer browser.
Around the time of the Microsoft verdict, a quarterly magazine from the Teach Democracy foundation wrote: “Microsoft now faces legal consequences as well as rapidly evolving technologies. Both may challenge its domination of the computer software industry.”
The same thing could be written about Google today, especially with the advent of artificial intelligence (AI). Notably, 24 years later, the impact on Microsoft from both the court decision and evolving technologies appears to have been negligible in terms of its dominance in operating systems and worker-productivity tools.
The same could very well hold true for Google. While Google benefits from these deals, its name is synonymous with search at this point. Given the choice, it’s highly unlikely a meaningful number of users will switch to a different default search engine.
Now in his ruling, Judge Amit Mehta wrote:
Google, of course, recognizes that losing defaults would dramatically impact its bottom line. For instance, Google has projected that losing the Safari default would result in a significant drop in queries and billions of dollars in lost revenues.
However, this loss in revenue would likely come from Google being replaced as a default search engine, not as one of several options from which users can choose. In this case, any deals with mobile companies and browsers will now likely be for much less money, while there is a strong chance its market share is barely impacted, much like how Windows’ market share wasn’t affected by the 2000 ruling.
Image source: Getty Images.
Investment Strategy: Buy, Sell, or Hold?
Given the court ruling, there is certainly a lot of uncertainty hanging over Alphabet, and one thing the market doesn’t like is uncertainty. However, the long-lasting impact of the ruling on the company is likely to be quite minor. Google did not become the dominant search engine because of these deals; it was already the leader even before the advent of smartphones.
Bing is unlikely to suddenly gain a lot of market share, while AI-powered upstarts are burning through cash and need to be able to gain share and monetize their users while being sub-scale. Apple could build or buy its own search engine, but its closed-wall ecosystem is already facing much scrutiny.
As such, I feel that much like Microsoft Windows has remained the king of PC operating systems, Google will continue to be the dominant player in search. At the same time, the company’s Q2 results have started to show the positive impact AI can have on its search business. AI provides an opportunity for the company to monetize a lot of search queries that it previously was not monetizing, as it only displays ads on about 20% of its searches. It is now just beginning to show new types of ads associated with queries that pull up AI-generated answers.
Trading at a forward price-to-earnings (P/E) ratio of just over 18 times 2025 analyst estimates, Alphabet’s stock is attractively priced, given its growth and the opportunities in front of it.
GOOGL PE Ratio (Forward 1y) data by YCharts.
Investors focused on the long term might find Alphabet’s recent stock weakness a good buying opportunity.
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