Google is considered a monopoly. Should investors ditch Alphabet stock?

A US federal judge ruled that Google, owned by Alphabet (GOOGL 1.01%)violated Section 2 of the Sherman Act, indicating that the company acted unfairly 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 (AAPL 1.37%) and Samsung to be the default search engine on their mobile devices. These deals have gotten pretty big over the years. For example, Google has an $8 billion, four-year contract with Samsung, while a revenue-sharing deal with Apple is believed to be worth more than $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 going forward?

End of exclusive search offers

Alphabet will no doubt appeal the decision, while a separate ruling will have to take place to determine the sanctions. This will take some time to unfold.

First, the decision could mean the end of exclusive search offers where Google will automatically become the default search browser for mobile devices. Instead, users can be given the choice of which search engine to use when setting up their mobile devices.

There was talk of simply adding a “choice screen” to the initial device setup process, allowing users to change their default search engines from Google to another search engine. In the worst case, the company could be destroyed, but this seems unlikely.

Ironic, Microsoft (MSFT 0.83%) was a key witness in the case, though he certainly had deep enough pockets to try to cut his own exclusive search deals. Meanwhile, Microsoft has been found guilty of its own antitrust practices since 2000. The government’s case against the company stemmed largely from the bundling of its Windows operating system with the Internet Explorer browser.

At the time of the Microsoft verdict, a quarterly journal of the Teach Democracy Foundation wrote: “Microsoft now faces legal consequences as well as rapidly evolving technologies. Both may challenge its dominance of the computer software industry.”

The same could be said of Google today, especially with the advent of artificial intelligence (AI). In particular, 24 years later, the impact on Microsoft of both the court ruling and evolving technologies appears to have been negligible in terms of its dominance in operating systems and worker productivity tools.

The same could be true for Google. While Google benefits from these deals, its name is synonymous with search right now. Given the choice, it is highly unlikely that a significant number of users will switch to another default search engine.

Now, in his ruling, Justice Amit Mehta wrote:

Google, of course, acknowledges that losing defaults would have a dramatic impact on its bottom line. For example, Google projected that losing Safari’s default value would result in a significant drop in queries and billions of dollars in lost revenue.

However, this loss of revenue would likely come from replacing Google as the default search engine, not as one of several options for users to choose from. In this case, any deals with cell phone companies and browsers will now likely be for a lot less money, while there’s a good chance its market share will be barely affected, just as Windows’ market share hasn’t was affected by the 2000 ruling.

Image source: Getty Images.

Buy, sell or keep?

Given the court ruling, there’s certainly a lot of uncertainty hanging over Alphabet, and one thing the market doesn’t like is uncertainty. However, the ruling’s long-term impact on the company is likely to be fairly minor. Google did not become the dominant search engine because of these offerings; it was already a leader even before the advent of smartphones.

Bing is unlikely to gain a lot of market share all of a sudden, while AI upstarts burn money and need to be able to gain share and monetize their users while sub-scale. Apple could build or buy its own search engine, but its closed-walled ecosystem is already facing a lot of scrutiny.

As such, I believe that just as 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 began to show the positive impact AI can have on its search business. AI gives the company an opportunity to monetize a lot of search queries that it previously didn’t monetize because it only serves ads for about 20% of its searches. Now it’s just starting to show new types of ads associated with queries that bring AI-generated answers.

Trading at a forward price-to-earnings (P/E) ratio of just over 18 times analysts’ 2025 estimates, Alphabet stock is attractively priced given its growth and the opportunities ahead.

GOOGL PE Ratio data (1 year ago) by YCharts.

Investors focused on the long term may consider the recent weakness in Alphabet stock a good buying opportunity.