Alphabet, the parent company of Google, is facing increasing pressure from analysts and regulators to break up its business. DA Davidson analyst Gil Luria believes that breaking up most or all of Google’s business would benefit investors, as the company struggles to maintain dominance in the AI chatbot era. Luria argues that by not breaking up, Alphabet is limiting Google’s potential and causing it to trade at a low earnings multiple compared to other growth companies.
The pressure on Alphabet to break up stems from a recent ruling by US District Judge Amit Mehta, who found Google guilty of illegally monopolizing the general search engine market. The Department of Justice has recommended that Google sell off certain parts of its business, including Chrome, its ad network, and possibly its mobile Android business. However, Luria and his clients believe that a more comprehensive breakup is necessary for Alphabet to unlock its full value.
Luria suggests that Alphabet should spin off each of its businesses into separate entities, as this would unlock greater value for investors. He estimates that the sum of Google’s individual businesses would be worth $3.7 trillion, significantly higher than its current market capitalization of below $2 trillion. By breaking up YouTube, Search, Google Cloud, Waymo, and its AI segments, Luria believes that each business could trade at levels comparable to their peers, resulting in a higher overall valuation for Alphabet.
One of the main arguments for breaking up Alphabet is the low earnings multiple at which the stock is currently trading. Luria points out that Alphabet’s stock is trading at just 16 times its forward earnings, well below the market average. By separating out its businesses, Luria believes that each segment could trade at a higher multiple, leading to a significant increase in shareholder value.
While Alphabet’s management has resisted calls for a breakup, Luria argues that their primary responsibility should be to maximize shareholder value rather than profit. He believes that Google Search, in particular, is facing challenges as the traditional online search market evolves with the rise of AI-powered search engines like Perplexity.
Despite the potential benefits of a breakup, Luria acknowledges that there are significant barriers to implementing such a change. Activist investors are unlikely to be able to force a breakup at Alphabet, as the company’s founders, Sergey Brin and Larry Page, retain controlling stakes in the company. Ultimately, Luria believes that only the founders have the power to initiate a breakup and unlock the full value of Alphabet’s businesses.
In conclusion, the debate over whether Alphabet should break up its business continues to intensify as regulators and analysts scrutinize the company’s dominance in the online search market. Luria and his clients believe that a breakup is necessary to unlock the full value of Alphabet’s businesses and maximize shareholder value. However, the ultimate decision rests with Alphabet’s founders, who hold the key to potentially reshaping the future of the tech giant.
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