Al Root

Alphabet faces regulatory and competitive headwinds weighing on the company's valuation. It might be time to break the tech giant up to "unleash" shareholder value.

"The only way forward for Alphabet is a complete breakup that would allow investors to own the business they actually want -- the top competitors to Netflix, Amazon Web Services/ Microsoft Azure, Trade Desk, and Uber/ Tesla," D.A. Davidson analyst Gil Luria in a Monday report.

Alphabet, of course, is a conglomeration of many tech businesses, including Google Search, Waymo, Google Cloud, YouTube, and others. Alphabet has the Android operating system, its own foundational AI models, and designs AI chips that work with Nvidia processors.

Google makes most of its money via advertising, which is why Luria included Trade Desk, which trades at about 45 times estimated 2025 earnings. YouTube competes for eyeballs with Netflix, which trades for 43 times estimated 2025 earnings. Waymo is pioneering self-driving taxi service like Tesla, which trades for about 150 times earnings. Cloud companies Microsoft and Amazon.com trade for about 32 times and 34 times earnings, respectively. Apple and Nvidia shares trade for closer to 28 times earnings.

All of those multiples are far greater than Alphabet's 17 times multiple. The biggest reason for the discount is essentially OpenAI and its ChatGPT, which threatens the search business. Alphabet, of course, is responding with its Gemini product and AI summaries in the traditional search results.

"The debate on search will not get better, and sum of the parts [valuation] only works if the company is willing to take action," added Luria. "Investors want a big-bang breakup, not isolated spin-offs."

That is the key to unleashing higher valuation, he says. "By keeping the conglomerate structure, management in dooming all of its businesses to the 16 times search multiple."

A big breakup is a bold idea. Whether the company will undertake it is anyone's guess. Alphabet didn't immediately respond to a request for comment.

Luria isn't the only one who thinks a breakup could help Alphabet. "Google's true value is suffocating under its own scale," says The Edge research founder Jim Osman, whose firm specializes in analyzing spinoffs. "Break it right, and YouTube, Cloud, and Waymo could each command a multiple the market isn't currently allowed to see. Great spin-offs create value long-term, but chaos often comes first."

Osman doesn't have a rating on Alphabet stock. Luria rates shares Hold, with a $160 price target for shares, but adds a breakup would make it a "top megacap pick."

Overall, 84% of analysts covering the stock rate shares Buy, according to FactSet. The average Buy-rating ratio for stocks in the S&P 500 is about 55%. The average analyst price target for Alphabet shares is about $200.

Alphabet stock was down 0.8% in early trading at $157.24, while the S&P 500 was up 0.5% and the Dow Jones Industrial Average was down 0.4%. Coming into Tuesday's trading, Alphabet shares were down 16% year to date.

Write to Al Root at allen.root@dowjones.com

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May 13, 2025 10:05 ET (14:05 GMT)

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