The Justice Department has suggested a breakup of Alphabet’s Google as a potential way to address its de facto search monopoly. The company is fighting back against the prospect. If it happens, however, investors might not be all that upset.
“The government seems to be pursuing a sweeping agenda that will impact numerous industries and products, with significant unintended consequences for consumers, businesses, and American competitiveness,” wrote Lee-Anne Mulholland, Alphabet’s vice president of regulatory affairs in a Tuesday blog post.
To call it a big deal would be an understatement. A breakup of a monopoly hasn’t happened since AT&T was split into pieces in the 1980s.
The Justice Department has until Nov. 20 to decide on what specific remedy it is seeking. U.S. 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 consider what the rest of Alphabet’s businesses could be worth and if the company could be more valuable in pieces.
“Right now nobody has to value to try to put a value of Waymo, nobody has to try to separate YouTube versus Google search,” says Bill Nygren, portfolio manager of the Oakmark Select mutual fund. “I think [doing that] would lead to a higher stock price.”
He is talking about a sum-of-the-parts, or SOTP, valuation analysis, which tries 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.
Today, Alphabet is valued at about $2 trillion including its cash and debt. Over the past 12 months, it has generated about $328 billion in sales and $135 billion in earnings before interest, taxes, depreciation, and amortization, or Ebitda. Sales and profits are expected to grow about 11% and 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 Alphbet’s cloud business.
Given that breakdown, figuring out how to value those assets is the next step. In the case of the cloud, investors can look at multiples of cloud leaders Microsoft and Amazon.com. Netflix and Meta Platforms could be considered similar to YouTube. Google is search, so investors might have to come up with their own valuation for that one.
Microsoft and Amazon trade for an average of about 21 times Ebitda, according to FactSet. That makes Google Cloud worth about $300 billion. Meta and Netflix trade for an average of about 17 times Ebitda, which implies a YouTube valuation of about $450 billion.
For Google search, investors might use a multiple like Apple’s, a number like that for the overall market, or even something lower, reflecting fears that Google could be disrupted by artificial intelligence. Alphabet, of course, has its own AI investments, including its own chips used for AI computing.
Using a market multiple of roughly 17 times 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 with significant potential is the self-driving robotaxi company Waymo.
To value that, investors have to look at Tesla. 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 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 real self-driving player. While it doesn’t make much money today, it is reasonable to value it at $300 billion.
All that adds up to about $2.6 trillion, roughly 30% more than where Alphabet trades today. It implies a stock price north of $210 a share, while the shares were at about $161 on Wednesday morning.
Part of the reason the SOTP numbers look so attractive is that coming into Wednesday trading, Alphabet shares were down about 13% over the past three months, a sign that investors are worried about antitrust problems. The shares are trading for about 18 times Ebitda, a discount to most of its peers.
SOTP valuations don’t prove anything and they don’t mean stocks will rally on a valuation revelation. They are just one more way to assess the opportunity and risk of an individual stock.
Alphabet stock was flat in morning trading while the S&P 500 and Dow Jones Industrial Average were both down less than 0.1%.