Class A shares of Alphabet (GOOGL) are sliding following media saying that the U.S. Department of Justice is preparing to open an investigation into Google's compliance with antitrust laws. Noting that this would not be Google's first antitrust probe, Bank of America Merrill Lynch analyst Justin Post highlighted that an investigation may not result in any action being taken. Nonetheless, potential implications could include new regulations on business practices, or an antitrust probe leading to a breakup, he added.
ANTITRUST INVESTIGATION: The Department of Justice is preparing an antitrust investigation of Alphabet's Google, The Wall Street Journal's Brent Kendall and John McKinnon reported on Friday, citing sources. The investigation is expected to probe Google's practices related to search and other businesses, people familiar with the matter told the Journal. The Federal Trade Commission investigated Google several years ago, and will defer to the Justice Department this time, sources said.
IMPLICATIONS COULD INCLUDE BREAKUP: Commenting on The Wall Street Journal report, Bank of America Merrill Lynch's Post noted that this would not be Google's first antitrust probe, and follows significant business practice scrutiny by the EU that has resulted in limited impact on Google's ad business. Further, he pointed out that an investigation may not result in any action being taken. If the DoJ, however, moves ahead, and investigation would likely embolden critics of Facebook (FB), Amazon (AMZN) and other tech giants as well, causing rhetoric to heat up during the 2020 election year, Post contended.
While antitrust investigations are difficult to predict, the analyst told investors that potential implications for Google could include new regulations on business practices, or an antitrust probe leading to a breakup. To break up Google, the DOJ would likely have to file a lawsuit and convince judges that Google has undermined competition, he added. The analyst noted that it is very rare to break up a company but not unheard of, with Standard Oil and AT&T (T) as past examples, though the government tried to break up Microsoft (MSFT) and failed.
Overall, Post argued that a DoJ probe would likely take more than five years to resolve and, if it were to happen, a breakup would be distracting for management, add G&A expenses, and potentially impact the long-term valuation creation by Alphabet companies that could be operated more cautiously. However, long-term, the analyst sees a breakup as potential positive for Google valuation. Potential benefits would include greater sense of urgency to monetize platforms, better allocation of capital, and more operational transparency that would support sum-of-parts valuations which could be value creating for the stock, he contended. Post reiterated a Buy rating and $1,350 price target on Alphabet’s shares.
GOOGLE OUTAGE: YouTube, Snapchat (SNAP), Gmail, Nest, Discord, and a number of other web services suffered from outages in the U.S. on Sunday, caused by issues with Google's Cloud service, The Verge's Tom Warren reported. While the issues largely affected those on the East Coast of the U.S., some YouTube and Gmail users across Europe also reported that they were unable to access the services, the report added, noting that even Shopify (SHOP) experienced problems because of the Google outage, which prevented some stores from processing credit card payments for hours. In a statement to The Verge, Google blamed "high levels of network congestion in the eastern USA" for the issues. "We will conduct a post mortem and make appropriate improvements to our systems to prevent this from happening again," the company added.
PRICE ACTION: In morning trading, class A shares of Alphabet have dropped almost 7% to $1,037.45.