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Stock Analyst Update

What DOJ's Antitrust Suit May Mean for Google

We expect Alphabet’s network effect and intangible asset moat sources to remain intact and are maintaining our wide moat rating amid antitrust suit.

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The Department of Justice (DOJ) filed an antitrust suit against Alphabet on Oct. 20, claiming that Google (GOOG) has engaged in monopolistic practices, helping it dominate the online search market. This case likely won’t be resolved anytime soon and may end up at the U.S. Supreme Court. (See our May 6 note, "Antitrust Flexes Its Anti-Big-Tech Muscle" on Morningstar.com.) Meanwhile, we think Google will continue to benefit from its leadership position in the digital ad market. We believe investors have rightly paid more attention to signs of recovery in ad demand, particularly the strong results rival Snap posted the same day the DOJ unveiled its suit. We expect Alphabet’s network effect and intangible asset moat sources to remain intact and are maintaining our wide moat rating.

We still believe a decision to force a breakup of Alphabet is unlikely and that fines, like those imposed in Europe (totaling about $10 billion), are more likely. Some case precedents, such as the 2011 Microsoft Internet Explorer settlement, do not look favorable, but they have created a playbook for tech firms to navigate regulatory scrutiny and prepare for enforcement actions. Also, the consumer welfare interpretation of antitrust law and other past large antitrust cases have set precedent that can benefit Google. We believe perhaps the biggest consequence of regulatory scrutiny is that Google will be hesitant to pursue major acquisitions, which may dampen growth.

Antitrust enforcement and further regulations do pose a threat to Google's use of data. However, increased restrictions on data access and usage would apply to all firms, not just the industry leader. We don't believe that more fines, fierce enforcement of antitrust laws, or the passing of new ones will allow competitors to overcome the network effects Google has created. Even if regulators ultimately succeed in forcing a breakup, we believe Alphabet is at least as valuable based on the sum of its individual parts as it is whole.

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Ali Mogharabi does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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