Alphabet (NASDAQ: GOOGL), Google’s parent company, could be worth significantly more if the company is forced to split into multiple parts, according to Laura Martin at Needham and Company. She believes the stock could be worth as much as 50% more than the current price, which is approaching six-month lows. The idea is not entirely new, and some analysts have for years said the company should split into smaller units.
There’s a lot of potential value to unlock within the Alphabet stable. Besides the search and advertising, there’s YouTube, Waymo, Gmail, and other apps, Android and Maps. In addition, there are other smaller projects. Any one of these could produce a massive home run for investors in the next few years.
Alphabet is trading on a historical price multiple of 27 and, based on analyst growth estimates, a forward multiple of 20. When one considers that Alphabet is also effectively a call option on all those other businesses, the valuation doesn’t seem stretched.
Does the DOJ Have A Valid Case?
The Department of Justice is investigating Google’s monopoly. However, whether or not there is a case to be made is complicated. Antitrust laws are there to protect consumers. Google’s monopoly is in search, but consumers don’t pay for the service – advertisers do. It won’t be easy to make a case that Google’s monopoly harms the interest of consumers.
Secondly, even if a case can be made, spinning off YouTube and other businesses isn’t going to affect Google’s monopoly in search. If a case is to be made, it would probably be around the way user data is used and shared across the company’s platforms. Whether or not current antitrust legislation covers that remains to be seen.
Furthermore, even if a case can be made, many believe that breaking up Alphabet and the other tech giants, may undermine U.S. leadership in the tech industry – at the expense of Chinese companies.
A New Narrative For Alphabet
Whatever happens with the DOJ will likely take a very long time. It’s probably more likely that Alphabet will decide to spin off other assets before it’s forced to do so. It may even be more likely that shareholder pressure will force it to do so.
However, we may see a new narrative developing around the company based on this idea. Alphabet’s price driver could well become speculation about spinoffs and the fact that it is trading at a discount to the sum of its parts. Whether or not the breakup value is really that high could become academic. It’s a narrative that makes sense, and if the market starts to believe the discount is as wide as 50%, it will probably narrow.
The same narrative could also cap the price if the valuation appears stretched, the discount isn’t wide enough, or the DOJ appears to lose interest. Speculation like this could have far more impact on the stock price than earnings growth that oscillates between 15 and 20%.
In other words, the price swings we’ve seen in the last 12 months could become the new normal for Alphabet, which would be good news for traders and frustrating news for investors.
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