Valuation "has never been so low", is the market pricing in Google's spin-off?

Google's second antitrust case opens, increasing the risk of business split and reaching a historically low relative valuation of stocks.

Related data shows that the 12-month forward price-to-earnings ratio of Google's parent company, Alphabet, is currently close to 17.5 times, while the overall price-to-earnings ratio of the S&P 500 index is about 20.8 times. Compared to the benchmark index, the discount of over 3 percentage points is the largest level since 2005.

The reason why Google's stock price has reached an unprecedented low may be due to the market betting on the possibility of Google splitting its business.

With the opening of the second antitrust case, the risk of Google's split is increasing day by day

In 2020, the U.S. Department of Justice, together with attorneys general from 52 states and jurisdictions, jointly sued Google, accusing Google of paying billions of dollars in "marketing expenses" to companies such as Apple and Samsung to ensure that its search engine becomes the default search engine for most smartphones and computers.

After more than four years of trial, on August 5th this year, the Federal District Court for the District of Columbia ruled that Google illegally monopolized the online search market, violating U.S. antitrust laws.

Following the defeat in the first case, this Monday, the U.S. District Court for the Northern District of Virginia opened the second antitrust case against Google, shifting the antitrust litigation threat to Google's digital advertising field.

If the ruling of the first case is ultimately established, Google is highly likely to be forced to split its Android operating system and Chrome browser platform; while in the second case, the U.S. federal government seeks to compel Google to sell its advertising technology services.

The advertising technology sector targeted by the second antitrust case is part of Google's huge advertising business, accounting for about one-tenth of its total revenue. Justin Patterson of KeyBanc Capital estimates that a complete divestiture of advertising technology could reduce Alphabet's expected earnings per share by 1% to 2% by 2025, which would be a "difficult trial" for Google.

Once the Department of Justice's Google split plan is implemented, Google will become the largest U.S. corporate split event since the breakup of the American telecommunications company AT&T in 1984.

The outlook for the split remains uncertain, with Wall Street generally optimistic

Despite the long-standing threat of federal government crackdowns on Google and its tech giant peers, this has not had a significant impact on their business momentum or investment attractiveness.

Currently, Wall Street still holds a relatively positive view of Google, with 78% of analysts rating Alphabet's stock as a buy. Most analysts believe that the likelihood of Google splitting its business is small, and there may be other punitive measures, such as prohibiting Google from paying high fees to companies like Apple to maintain its default search engine status.

However, analysts' tone on the company's recent regulatory challenges has significantly shifted:

Mark Mahaney of Evercore ISI stated in a report on Monday that he holds a more cautious view on the outlook for Alphabet, predicting "significant uncertainty" in the next 12 months.

Mark Shmulik of Bernstein wrote earlier this month that it is hard to imagine Google coming out of this battle "unscathed".

Since June this year, Alphabet's stock price has fallen by nearly 14%, which stands out significantly compared to other major tech stocks amid the current market style rotation and growing concerns about the returns on AI investments.

Doug Anmuth of JP Morgan stated in a report on September 3rd:

"We believe Google cannot continue as is, and we expect the judge to rule on punitive remedies against Google."

According to reports, the presiding judge in the Google antitrust lawsuit is planning to make a final ruling on remedies by August next year, and Google is likely to appeal any unfavorable ruling, keeping the case in uncertainty for a long time