Investors Push for Google Breakup Amidst AI Challenges
Investors in Alphabet, the parent company of Google, are increasingly advocating for the breakup of its various business segments. According to DA Davidson analyst Gil Luria, Google is facing significant challenges in maintaining its dominance in the search engine market, especially with the rapid advancements in artificial intelligence chatbots. During a recent interview with Yahoo Finance, Luria suggested that separating Google’s business units could provide a more favorable outcome for investors as the company struggles to adapt.
Investment Concerns and Google’s Market Position
Luria expressed that the current management decisions at Alphabet are leading the company to trade at an “extraordinarily low earnings multiple for a growth company.” He emphasized the potential benefits of restructuring Google into distinct, independently traded entities, as opposed to merely implementing isolated spinoffs recommended by the Department of Justice.
Last August, U.S. District Judge Amit Mehta ruled that Google was illegally monopolizing the general search engine market, which has resulted in ongoing discussions about potential remedies to such monopolistic behavior. These discussions come at a time when companies are increasingly integrating artificial intelligence into their services, which introduces new dynamics to the traditional online search landscape.
Department of Justice’s Stance on Google’s Structure
The Department of Justice has proposed various measures, including the divestment of Google’s Chrome browser and its advertising network. There are also considerations for potentially selling off the mobile Android business. The urgency for these actions reflects a broader concern regarding Google’s market dominance and its implications for competition within the tech industry.
Investor Perspectives and the Call for Action
Luria noted that his clients, which include a diverse range of institutional investors, are in favor of a “big bang breakup” of Google. He believes this approach would allow each of Google’s individual business segments—such as YouTube, Google Cloud, Waymo, and its AI divisions—to achieve higher valuations independently.
“Everyone knows that the best thing for Google is to break it up, except for Google itself,” Luria stated, pointing out that the current structure limits the company’s potential worth. His analysis indicates that when valued separately, Google’s various business segments would collectively be worth approximately $3.7 trillion, well above its current market capitalization of under $2 trillion.
Valuation Insights on Google’s Business Units
Luria offered a detailed comparison of how Google’s business segments could perform in the public market. For instance, Waymo could be valued similarly to Uber, Google Cloud to Snowflake, YouTube to Netflix, and Google’s TPU (tensor processing unit) business to Nvidia. Each of these comparisons indicates that if standalone, these units would likely trade at a much higher valuation than their current status under Alphabet’s umbrella.
Further solidifying his argument, Luria highlighted that Google’s AI-related businesses, including its chip manufacturing unit and Google DeepMind, could be valued around $760 billion in total. He posited that this restructuring could potentially lead to Alphabet’s stock price soaring between $240 and $300 per share, compared to its recent trading price around $160.
Market Dynamics and Google’s Future Challenges
Luria has also voiced concerns about the sustainability of Google Search, describing it as “a melting ice cube.” With the ongoing debate about Google’s capabilities to pivot from a search monopoly to potentially dominating the AI chatbot sector, the company’s future remains uncertain. He referenced comments made during Alphabet’s antitrust trial, particularly those from Apple’s Eddy Cue, pointing out a noticeable decline in searches on the Safari browser, which defaults to Google Search.
There are speculations that Apple’s reduced search traffic might be part of a strategy to present Google Search as a vulnerable business, thereby preserving their lucrative partnership with Google. Such dynamics add complexity to the competitive landscape that Google faces and the potential need for restructuring.
Barriers to Breakup and the Role of Founders
Despite the logical appeal of breaking up Google, Luria acknowledged significant barriers to achieving such a transformation. Activist investors might find it challenging to influence changes within Google due to the control held by its founders, Sergey Brin and Larry Page. Luria remarked that “only the founders can save shareholders,” indicating that without their willingness to embrace a breakup, the prospects for a structural overhaul remain slim.
Conclusion: Navigating a Rapidly Changing Landscape
As Google navigates the rapidly evolving landscape of digital technology and artificial intelligence, investors remain vigilant and active in discussing strategies that could enhance shareholder value. Whether through a dramatic restructuring or gradual adjustments, the future of Google will depend largely on its ability to adapt to new market realities while responding to shareholder pressures. As such, the call for a breakup continues to echo among those who believe that a divided Google could thrive in a competitive ecosystem and better reflect the true value of its diverse portfolio of businesses.
