The specter of a breakup crisis looms large, Google investors may be losing sleep

According to the VESYNC Financial APP, investors in Alphabet (GOOGL.US) are facing long-term uncertainty as they grapple with a situation they previously thought unlikely: the potential breakup of Google.

Reports on Tuesday indicated that the U.S. Department of Justice is considering splitting up Google, with the most likely divisions being the Android operating system and Chrome browser. This news came as a surprise to Wall Street, as even after a federal judge ruled earlier this month that Google illegally monopolized the search market, Wall Street had still believed that a breakup of Google was unlikely.

While the breakup of the company is just one of the options being considered by the U.S. Department of Justice, the news adds to the risks at a time when investors are already uneasy about the prospects of large tech companies. With Google planning to appeal the antitrust ruling in the search market, any pressure on the company's stock price could persist for some time.

Howard Chan, CEO of Kurv Investment Management, said, "There is a lot of uncertainty about how this will play out, and it will be months before we have answers. Google remains a strong company and will continue to generate revenue until the issues are resolved, but this is also a time when there are many challenges in the field of artificial intelligence and search. We expect to see more volatility in the future."

On Wednesday, Google fell by 2.31%, with a market value loss of over $47 billion, overshadowing the positive news of Google's launch of artificial intelligence devices that will compete with Apple's (AAPL.US) iPhone 16 in the market. The stock has dropped 16% from its peak in July, but is still up 15% since the beginning of the year.

Prior to this, investors had been nervous about the future of large tech stocks. Since mid-July, due to concerns about the health of the U.S. economy, investors have been shifting from expensive tech stocks to cheaper sectors, and are increasingly worried about whether these companies can get more returns on their massive investments in artificial intelligence.

Google's performance last month did little to alleviate concerns. The company's continued aggressive investment in artificial intelligence led to higher-than-expected capital expenditures, and the underperformance of the YouTube business was also disappointing. While Google continues to deliver strong growth and cash flow, and announced a large shareholder return plan earlier this year, long-term regulatory pressures could undermine these favorable factors.

Scott Yuschak, Managing Director of Stock Strategy at Truist Advisory Services, said, "The only reason these companies can fund large-scale artificial intelligence projects and still return cash to shareholders is because of their sheer size, and a breakup would definitely impact this dynamic."

"Large tech companies benefit from scale. If you make the scale disappear through a breakup, there will be a cost. We are not sure what it will be. This has become a new big issue."

However, one factor that may limit downside risk is that Google's stock price is still relatively cheap compared to other tech giants. The stock's price-to-earnings ratio is close to 19 times, lower than its 10-year average and the overall market level. The company is also the cheapest among the "Big Seven," with expected double-digit profit and revenue growth in 2024 and the following two years.

Therefore, Google remains popular on Wall Street. Over 80% of analysts recommend buying the stock, with an average target price indicating nearly 30% upside potential from the current level.

Some analysts even welcome a breakup, seeing it as a way to unlock value. Earlier this month, Needham analyst Laura Martin calculated that splitting Google could bring a 10%-15% upside, as investors typically pay higher prices for pure assets. She believes that if traded separately, the valuation of YouTube alone could reach as high as $643 billion. This would make its scale four times that of Disney (DIS.US).

Seabreeze Partners President Doug Kass agrees with this view. He said, "If you look closely at the various components, you will find that many valuable businesses are somewhat obscured by this corporate conglomerate. I think separating them would be more valuable than keeping them together."