By Asa Fitch

Alphabet's future has become so murky that analysts are starting to suggest the Google parent voluntarily break itself up. But a look under the hood shows surprising upside potential.

There is little question that Alphabet has found itself in some trouble, largely because of antitrust scrutiny in the U.S. and Europe.

In the span of a year in the U.S., federal courts have judged Google a search-engine monopolist and an ad-software monopolist. Each of those cases await penalties. In Europe, it is fighting a $4.33 billion antitrust fine over its Android operating system and faces scrutiny under the continent's Digital Markets Act.

The other big concern for Alphabet shareholders is the threat OpenAI and its ChatGPT tool pose to Google's near 90% search share. Consumers and companies are relying increasingly on artificial intelligence as a source of information and as an internet entry point, challenging a search business that accounted for nearly 60% of Alphabet's revenue in its latest quarter.

Tesla is poking at the nascent robotaxi market Google's Waymo leads in, too, rolling out an autonomous fleet in Austin, Texas, recently that is in its early stages but comes with Elon Musk-sized ambitions.

Given those circumstances, it is easy to understand why investors haven't been kind to Alphabet this year, pushing its stock down 8% as the S&P 500 rose 6%. AI rivals Microsoft and Meta Platforms are both up roughly 20%.

"We believe the only way forward for Alphabet is a complete breakup that would allow investors to own the businesses they actually want," analysts at D.A. Davidson argued in a recent series of notes. They estimated that six stand-alone companies, valued separately, would be worth the equivalent of $304 a share for the parent, a massive premium over its $175 closing price Tuesday.

Still, there is a more compelling case to be made that Google isn't as troubled as it seems. What is more, its doldrums-status valuation at around 18 times forward earnings makes it a rare AI bargain. Two of its closest competitors -- Microsoft and Amazon -- are trading above 32 times forward earnings.

On the antitrust front, while the Justice Department is asking to force Google to divest its Chrome browser business, its ultimate punishment is likely to be milder.

Google will almost certainly be forced to stop making payments to insert its search engine into Apple's Safari browser -- a practice clearly designed to squeeze out competition. Taking aim at Chrome, though, "seems excessive given the court ruled that Google acquired its monopoly lawfully," analysts at Canaccord Genuity said in a note in May, arguing that the Justice Department "may have proposed the Chrome divestiture to make its other remedies appear more reasonable."

Alphabet is likely to be forced to spin off parts of its ad-tech business as a result of the other major U.S. ruling against it -- but those units are far from crucial to the company's financial fortunes. Revenue in the division that houses them has been declining in recent years, reflecting partly how Google's focus has shifted elsewhere.

Meanwhile, the suggestion that AI tools are going to undermine Alphabet's search business is easy to overstate. While traffic to OpenAI's ChatGPT has grown massively, Google's Gemini AI tools, and the AI overviews that appear in its searches, are gaining traction too. Gemini was drawing 350 million monthly users as of March, the company disclosed in court documents, versus an estimated 600 million monthly for ChatGPT. Some 1.5 billion people are using Google's AI overviews monthly, chief executive Sundar Pichai said in April.

And in the robotaxi world, Google might not be getting a lot of hype, but it is well ahead of Tesla. Google's Waymo robotaxis are already operating in several cities, and the business looks cheaply valued at $45 billion as of last year.

A breakup of the company might still hold appeal, given how the value of its businesses don't seem to be reflected well in its share price. But there is a fundamental flaw in that reasoning, too: Alphabet isn't some loosely knit conglomerate with divisions that barely interact.

Different parts of Google help each other. Its custom-made AI chips help power search results but also have a role in its cloud-computing operations. Search revenue helps fund costly AI endeavors that cut across its divisions and could find new applications -- in humanoid robots, for example. Platforms like Gmail, Chrome, Google Maps and the search engine all feed vital data into the group and serve as distribution points for product rollouts.

Scale matters too, especially in the AI race. As a bunch of separate companies, the capital spending Alphabet plans -- about $75 billion this year -- might be harder to justify.

All of that makes Alphabet more bargain than basket case.

Write to Asa Fitch at asa.fitch@wsj.com

(END) Dow Jones Newswires

July 09, 2025 05:30 ET (09:30 GMT)

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