Google faces "significant risks", will Apple switch "default search"? But investors see "cheap"

Google's "Century Antitrust Case" is still ongoing, and long-time "ally" Apple is suspected of "running away," while investors are rubbing their hands, preparing to "buy the dip" on Google.

On October 5th, there were reports that Apple is considering using DuckDuckGo as the default search engine for Safari's privacy mode, replacing the original Google search.

Apple is currently in negotiations with DuckDuckGo, and more details are expected to be announced later this week. These contents will be presented in the form of testimonies from Gabriel Weinberg, CEO of DuckDuckGo, and John Giannandrea, an Apple executive, in the Google antitrust case.

Earlier, the judge in charge of the case allowed the two individuals to testify in a non-public court, but later ruled that the testimony "involved the core of the case" and should be made public.

Google is facing the "Century Antitrust Case," the most severe threat it has faced in 25 years. The U.S. Department of Justice stated that Google paid billions of dollars to Apple and other companies to become the default search engine for web browsers and smartphones.

Federal and state antitrust enforcement agencies in the United States claim that these deals prevented other search engines such as Microsoft's Bing and DuckDuckGo from accumulating users and becoming competitors to Google.

On Monday, Microsoft CEO Nadella testified that Microsoft has offered Apple $15 billion in annual compensation to change Safari's default search engine to Bing. Nadella even said he was willing to hide all Bing branding and let Apple use the search engine as its own brand.

On Friday, September 22nd, John Giannandrea testified that the latest Apple iOS 17 operating system update has added a setting that allows users to choose a search engine other than Google when browsing in privacy mode.

There are also reports that Google currently pays Apple over $15 billion annually, possibly close to $20 billion, but these amounts are considered trade secrets and are not disclosed by the two companies.

There is no doubt about Apple's significance in the search field. The iPhone occupies a large portion of the U.S. smartphone market share and a significant portion in most European countries. In the United States, about 35% of web browsing (mobile and desktop) and 20% of web browsing worldwide and in Europe are done through Safari.

Deep Integration between Google and Apple

Public information shows that Google and Apple reached an agreement as early as 2005 to make Google the default search engine for the Safari web browser. By 2014, Google was paying Apple about $1 billion annually to maintain this advantageous position. In 2016, the two tech giants successfully renewed their contract, expanding the scope of Google's search engine to include Apple's Siri and Spotlight. Previously, Siri had been using Microsoft's Bing search engine, while Spotlight was a search function for finding programs and files on Apple devices.

According to the indictment from the US Department of Justice, in 2018, Apple CEO Tim Cook and Alphabet CEO Sundar Pichai met again to discuss how the two companies could collaborate to drive search revenue growth.

In return, Apple would receive a portion of the advertising revenue that Google generated from searches made through the Safari browser, with the highest share being 50%. The US Department of Justice believes that as the browser for iPhones, iPads, and Mac computers, Safari has become widely popular along with Apple devices, and Google has developed into a company that pays Apple between $4 billion and $7 billion annually to maintain the agreement.

In 2012, a Google executive informed investigators from the US Federal Trade Commission (FTC) that if Apple were to replace Google search with Microsoft's Bing, Google's search volume could decrease by as much as 50%. Internal Google emails also revealed that executives expressed the idea of "paying for promotion of ads and search default settings" and "using revenue sharing to obtain search exclusivity."

Google has also actively pursued similar agreements with tech competitors, smartphone manufacturers, and wireless network providers outside of Apple. The US Department of Justice believes that this is to maintain its monopoly position in the search field.

Market: "Bottom Fishing" Google

However, for the market, the Google antitrust case has more significance in that investors can buy Google at a cheaper price.

Since the beginning of this year, Alphabet's stock price has surged by 51%, falling less than 4% from its September high, while Amazon and Apple's stock prices have dropped by over 12% from their recent highs.

Matt Miskin, Co-Chief Investment Strategist at investment management firm John Hancock, said:

If you look at the stability of returns, Alphabet is near the top. It is an important quality stock, trading at a slightly lower price compared to its peers, and should be a major player in the field of artificial intelligence. It's hard not to like the opportunity for relative value.

Although Google's performance in the race for artificial intelligence has been lackluster, its core business has not been significantly affected.

According to the latest data from Statista, since the release of ChatGPT in November last year, Google's market share has remained almost unchanged at around 84%, while Bing's market share has remained stable at around 9%. The recovery in demand for digital advertising is also helping to boost Google's revenue and profit expectations. Analysts' profit forecasts for 2024 have risen 7.8% in the past three months, while sales forecasts have risen 1.9%.

Industry insiders say that unlike many of the largest internet and tech stocks, Alphabet's valuation is not excessively high. Its price-to-earnings ratio is less than 20 times, lower than the Nasdaq 100 Index and lower than its average P/E ratio over the past 10 years. In comparison, the stock prices of Apple and Microsoft are higher than the market and their own historical levels.

Michael Scanlon, investment manager at investment management company Manulife, said:

Ultimately, Alphabet offers premium profit growth, strong capital returns, high brand recognition, and a powerful market position, and it is a leader in the field of artificial intelligence.

However, its valuation is in line with the S&P 500 Index. This makes it very attractive, very attractive.

He said that antitrust lawsuits are unlikely to harm the company's business, and the worst-case scenario (i.e., the Department of Justice winning the case and Google being split up) could actually become a positive catalyst.

Alphabet's deal is very good when calculated by the sum of its parts, and this stock does not reflect the value of all its businesses.

If it is split up, investors will be very excited to get individual parts.