Alphabet Dodges a Bullet on Antitrust, but It's Still Not Out of the Woods

Key Points

• Alphabet is involved in two antitrust cases, one involving search and another related to its ad tech businesses.

• The judge in the first case has already suggested remedies, but the consequences for the second case have yet to be determined.

• Investors have been buying up Alphabet's stock now that a worst-case scenario appears to have been averted.

• 10 stocks we like better than Alphabet ›

One of the biggest issues weighing on Alphabet's (NASDAQ: GOOG)(NASDAQ: GOOGL) stock in recent months has been concerns around antitrust and whether the company will be broken up. Alphabet has become a beast over the years. It not only owns the world's go-to search engine (Google) but also owns a top browser (Chrome). On top of all this, it has an incredibly popular video-sharing website in YouTube and has been launching autonomous vehicles through its Waymo business.

Alphabet has become a huge business over the years, but investors haven't been valuing it nearly as high as other tech stocks. A key reason for that may be related to concerns about what lies ahead for the company, including whether it will be broken up and how artificial intelligence (AI) may impact its operations in the years ahead.

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Recently, however, the company got some good news in an antitrust case: It won't have to be broken up. That has led to a bump up for the stock. But Alphabet's antitrust woes aren't necessarily over just yet.

Image source: Getty Images.

Another case still looms

U.S. District Judge Amit Mehta ruled that Alphabet will not need to divest its Chrome browser or Android operating system. This was related to the finding that Google has a monopoly on search. The most concerning issue for the business is that it will have to share data with its rivals. It plans to appeal the ruling, which means that the case is likely to go to the Supreme Court and could still drag on for multiple years.

This isn't the only antitrust case involving Alphabet, however. Earlier this year, another judge, Leonie Brinkema, also found that Google has monopoly power in multiple ad tech markets. The Department of Justice is looking for Google to divest assets related to that, but nothing as high profile as potentially losing its Chrome browser, which was the big fear related to the most recent ruling. Court proceedings are expected to resume this month.

The worst-case scenario for Alphabet appears to have been averted. But when it comes to government rulings, it's difficult to predict how things may play out. As long as both of these antitrust cases remain open, there's still going to be some risk and uncertainty ahead for Alphabet.

Alphabet's business remains solid

With many high-performing business units under its umbrella, Alphabet has become a compelling growth stock to own. In its most recent quarter, which ended on June 30, its revenue totaled $96.4 billion, which grew at a rate of 14% year over year. And it did this while still achieving an impressive operating margin of 32%.

For all the concerns that AI will disrupt its business or hurt ad sales, Alphabet remained a big player in the space. And AI may in fact end up helping its operations more than hurting them. Its AI overviews in search, for example, have made it easier for users to quickly see a summarized answer to what they are looking for. There is also an AI mode users can access if they prefer AI-generated responses rather than the traditional Google search results. The company has been showing that it can easily adapt to AI and that AI may not have the crippling impact that some investors expected it might have on its operations.

The stock still looks like a deal right now

Shares of Alphabet have been rising since news of the potential antitrust remedies came out. The news calmed investors' fears about the business. But even with the recent bump in share price, the tech stock still trades at a fairly modest forward price-to-earnings (P/E) multiple of 22. The average S&P 500 stock is averaging a forward P/E of 24.

As a robust business, it can be argued that Alphabet deserves a better-than-average multiple. Yet, it's trading at a discount when compared to the overall market. For long-term investors, Alphabet is a slam-dunk buy right now.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.