Is Alphabet Stock a Buy Now?

Shares of Alphabet (GOOGL) have seen significant price fluctuations this year. Starting from a 52-week low of $127.90 in December, the stock rose to $191.75 by July. However, in August, a federal court determined that the company's practices, especially regarding Google Search, constituted a monopoly in violation of antitrust laws, which caused the stock to drop sharply.

Following this legal decision, Alphabet's stock experienced some recovery, but fell again after the U.S. Department of Justice (DOJ) suggested a series of changes that could dramatically impact how Google operates. This situation brings investors to question: is now the right time to buy Alphabet stock?

What the DOJ Proposals Mean for Google

One major aspect of the antitrust ruling against Alphabet is its practice of paying other tech companies, including Apple, to keep Google as the default search engine. This strategy has allowed Google to secure about 90% of the online search market.

The DOJ's recent proposals to address these issues, made on November 20, are an effort to determine the penalties Alphabet will face. One possible outcome could be the termination of these third-party payment agreements.

Even if such arrangements were to end, the impact on Alphabet's revenue might be limited. Much of the revenue from these partnerships is returned to the partners, meaning that Google's overall business could remain robust despite the potential loss of some search market share.

Consumers are unlikely to abandon Google simply because it is no longer the default search option on their devices. Many users might still opt to download the Google search app, which saw over 11 million downloads in July alone.

Additional Challenges for Alphabet

While the end of third-party payments is concerning, there are more significant worries on the horizon. The DOJ is also seeking for Alphabet to divest its Chrome browser and Android operating system, both of which currently hold dominant positions in their markets. As of August, Chrome controlled 65% of the browser market, while Android claimed a 72% share of the mobile operating system market.

Divesting either of these operations could greatly hurt Alphabet, as both contribute significantly to the Google services sector, which generated $76.5 billion of the company's $88.3 billion revenue in the third quarter. Alphabet plans to file a counterproposal in December, and the legal proceedings will extend into 2025.

The likelihood of such divestitures actually taking place remains uncertain. Looking back, a similar antitrust case occurred in 1998 when the DOJ won a case against Microsoft for its internet practices. Although the company faced pressure to break up, it successfully appealed and reached a settlement. Since then, Microsoft’s stock has thrived.

If Alphabet can avoid a breakup and navigate the current legal woes successfully, it has the potential to flourish in the long run. The company's third-quarter results were encouraging, as revenue grew 15% year-over-year to $88.3 billion, and net income increased from $19.7 billion to $26.3 billion compared to the previous year. Additionally, Alphabet had $17.6 billion in free cash flow that comfortably covered its $2.5 billion dividends for the quarter, leaving ample funds for further investments in growth.

Should You Invest in Alphabet Stock?

The ongoing legal matters and their resolutions will undoubtedly shape Alphabet's future. The company is heavily investing in artificial intelligence, which could drive revenue growth moving forward, and its cloud business grew by 35% in the third quarter, reaching $11.4 billion in revenue.

However, the outcome of upcoming legal decisions, particularly in another antitrust case focusing on its digital advertising operations, poses potential risks. This area is critical, as Alphabet's advertising revenue accounted for $65.9 billion of its $88.3 billion overall revenue in Q3.

With these major legal disputes unresolved, it may be wise for investors to wait until more clarity is provided. However, such legal proceedings could linger as Alphabet's leadership has indicated that appeals are likely, which could extend the timeline into years.

For those willing to accept higher risk, now might represent a favorable opportunity to invest in Alphabet. The stock has seen a downturn, resulting in a lower price-to-earnings (P/E) ratio compared to competitors like Meta Platforms and Microsoft. A lower P/E indicates that shares may be undervalued.

If you are looking to hold Alphabet stock for the long term, the current situation—with its reasonable P/E ratio and strong business fundamentals—might make it an appealing investment option.

Alphabet, Stock, Investment