Alphabet (GOOGL, GOOG) investors would be better off breaking up most or all of Google’s business as it struggles to prove that its search engine can maintain dominance in the AI chatbot era, DA Davidson analyst Gil Luria told Yahoo Finance in an interview Tuesday.
“ By not breaking up, the company management is dooming Google to trade at … an extraordinarily low earnings multiple for a growth company,” Luria said.
Last August, US District Judge Amit Mehta found Google liable for illegally monopolizing the general search engine market and the market for general search engine text, Yahoo Finance’s Alexis Keenan reported. Mehta is now tasked with weighing fixes for the monopoly — while also balancing advances in artificial intelligence that are forcing an evolution of the traditional online search market, Keenan wrote.
The Department of Justice has asked Mehta to force Google to sell off Chrome and divest its ad network, as well as possibly its mobile Android business.
Luria said his clients — a broad range of institutional investors — want Google to undergo a “big bang breakup” rather than “isolated spinoffs” like the DOJ has suggested. He thinks Google should spin off each of its businesses into separately traded entities.
“ Everybody knows that the best thing for Google is to break it up, except for Google,” he said.
According to Luria’s analysis, which used company earnings reports from Alphabet and rivals, Google’s individual businesses would be valued much more highly as separate entities.
Whereas Google’s market capitalization is below $2 trillion, Luria said in a note to investors Monday that the lump sum of Google’s businesses, when valued separately, would be $3.7 trillion.
Luria said Google should break up YouTube, Search, Google Cloud, Waymo, and its AI segments.
That’s because Alphabet stock is trading at a historically low multiple of 16 times its forward earnings (over the next 12 months) — ” well below market multiple,” he said.
Luria said Google’s businesses would each individually trade at comparable levels to their peers — with Waymo comparable to Uber (UBER), Google Cloud to Snowflake (SNOW), YouTube to Netflix (NFLX), and Google’s TPU business to Nvidia (NVDA).
For example, he estimated that Google’s AI businesses — its chip segment and Google DeepMind — would together be worth $760 billion. Google makes custom chips called TPUs, or tensor processing units, for itself that its customers can use to power their cloud services.
“ The stock could be worth anywhere between $240 and $300 if they proceeded in this path,” Luria told Yahoo Finance. Alphabet shares were trading around $160 on Tuesday.
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