Should You Invest in Alphabet Ahead of Next DOJ Moves?

Alphabet (GOOG 1.31%) (GOOGL 1.36%) suffered a major setback on August 5 after the US Department of Justice (DOJ) ruled that Google had illegally monopolized the online search and text advertising markets. In a statement, Attorney General Merrick Garland called the antitrust victory a “historic victory for the American people,” which showed that “no company — no matter how big or influential — is above the law.”

This ruling paves the way for another trial, in which the DOJ will directly target Google’s dominance of the display advertising market, on September 9. Several recent reports suggest that the DOJ could push for a breakup of the tech giant by divesting its Android. operating system and web browser Chrome or force Google to share more of its data with other advertising platforms, while introducing stricter restrictions on its AI-based services.

Image source: Getty Images.

That uncertainty cast a dark cloud over Alphabet’s future, but its stock held steady after the news and remains up nearly 25% over the past 12 months. Should investors still buy Alphabet stock before the DOJ makes its next moves?

A look at Alphabet’s strengths and weaknesses

To assess regulatory risks, we need to understand Alphabet’s business. Google Alphabet owns the world’s leading search engine, video streaming platform (YouTube), webmail platform (Gmail), mobile operating system and web browser. It also owns the third largest cloud infrastructure platform in the world (Google Cloud). This extensive ecosystem gives Google a wealth of data on which to base its targeted ads.

Alphabet generated 76% of its revenue from Google’s advertising business (its search and display ads, ad network and YouTube) in its most recent quarter. Another 12% came from the Google Cloud platform, while 11% came from paid subscriptions, non-advertising platforms and hardware devices. All three core businesses grew revenue at double-digit rates in the first half of 2024.

Data source: Alphabet. YOY = Year Over Year.

Google’s ad business cooled in 2022 as it faced macro headwinds and intense competition from other platforms like TikTok and ByteDance. Meta platforms‘ (META -0.46%) Facebook and Instagram. But its ad revenue has picked up again over the past year as YouTube ad sales have grown and the macro environment has stabilized.

Google Cloud’s growth has also accelerated as the rapid expansion of the generative AI market has led more companies to upgrade their cloud infrastructure. Google’s launch of its new Gemini AI tools boosted that growth — even if its AI efforts generally haven’t gotten as much attention as Microsofthis (MSFT -0.19%) partnership with OpenAI.

Google’s subscription business also continues to expand as it locks more users into its YouTube Premium, YouTube Music and Google One plans. This expansion could gradually reduce its reliance on macro-sensitive ads.

How could the DOJ affect Alphabet’s growth prospects?

If the DOJ forces Alphabet to give up Android, it could become harder for Google to bundle its first-party cloud apps with new smartphones and tablets. However, Android is already an open-source operating system that has already been modified by other companies such as Samsung and Amazon (AMZN -0.30%) for your own devices. Microsoft has even worked with Samsung and other smartphone makers in the past to pre-install its own cloud apps instead of Google apps on its latest devices.

Therefore, Android is really just a custom launch platform for Google to generate revenue from the Play Store and its other cloud-based apps. So as long as consumers are still voluntarily installing those apps on their Android devices, its mobile growth strategy will remain largely intact — even if Google has to spin Android off as a separate company.

Shutting down Google from Chrome would likely cause more damage. Chrome accounts for nearly two-thirds of the web browser market, according to StatCounter, and the company collects data about its users (unless they opt out) to create targeted ads.

Forcing Google to share its primary data with other advertising platforms would also create headwinds by narrowing its moat against ByteDance, Meta and other advertising giants. Limiting the data it can gather for its generative AI services could further disrupt the evolution of its own search engine as OpenAI expands its new SearchGPT engine.

Is it a good time to invest in Alphabet?

If the DOJ ruling had triggered a steep selloff and crushed Alphabet’s valuations, I’d consider nibbling on it as a contrarian play. But its stock barely budged after the ruling and still trades at 21 times forward earnings — and that valuation could rise if analysts scale back their expectations to account for unpredictable regulatory threats. Investors should also remember that Alphabet faces other ongoing regulatory challenges in Europe in addition to its antitrust lawsuits in the US.

So for now, I would avoid Alphabet until the DOJ makes its next moves. There are plenty of other attractive tech stocks to buy right now — and I’d rather own them than roll the dice on Alphabet’s ability to weather antitrust headwinds.