Google stock rating cut at JPM on risk of anti-trust penalties

Investing.com -- JMP Securities downgraded Google owner Alphabet’s (NASDAQ:GOOGL ) stock from Market Outperform to Market Perform.

The decision comes in anticipation of the court's remedies following Google's loss in an antitrust case in August, with a court date expected in March or April and a final ruling by August 2025.

JMP Securities predicts Alphabet's valuation multiples will be capped due to the potential changes in Google's distribution, particularly on iOS devices where over half of U.S. search volume occurs.

The firm highlighted the importance of default search settings, noting that a significant portion of iOS queries are conducted through Safari's default search engine. They raised concern that if Google were to be replaced as the default on iOS devices, it could lose between 60%-80% of its iOS query volume.

“Simply put, we view Google’s distribution across iOS, Android, and Chrome as Google search’s primary defensible moat and with the court threatening this even as appeals likely push any actual punishment out, we expect valuation to be capped until there is greater legal certainty,” JMP analysts said in a note.

The analysts pointed out that there is no clear remedy to the antitrust case that would not severely impact Google. They note that the court might prevent Google from making revenue share distribution payments or force a breakup of Android and Chrome.

Another possibility is that the court could mandate Google to distribute its search index at cost, fostering greater competition and potentially benefiting companies like Apple (NASDAQ:AAPL ), Reddit (NYSE:RDDT ), and Meta (NASDAQ:META ) in offering search services.

“We think there is a substantial opportunity for social networks to take share of queries as search is evolving with LLMs, especially given Meta’s existing distribution with chat-based apps: WhatsApp and Messenger,” analysts continued.

JMP Securities estimates that losing search access point distribution in the U.S. could impact Google's earnings per share (EPS) by $1.15 by 2026, equating to a 2.3 turn decrease in the consensus 2026 EPS multiple.

They based this estimate on the assumption that 48% of search revenue is U.S.-based and that Google could recover 35% of query volume if users change back their default settings. The analysis also considers the cessation of Traffic Acquisition Costs (TAC), which currently amount to an estimated $14.5 billion.

JMP concluded that given the uncertainty surrounding the court-ordered changes to Google's search distribution, there is a downside risk to estimates, and they believe the risk/reward profile for Google's stock is now balanced.

Moreover, the analysis did not factor in a potential forced divestiture of Chrome or Android, which could further exacerbate the situation if it were to occur.

Source: Investing.com