Jefferies analysts maintain 'Buy' on Alphabet despite antitrust risks

Jefferies analysts reaffirmed their "Buy" rating for Alphabet Inc (NASDAQ:GOOGL ) on Sunday, despite ongoing antitrust concerns, following insights from a discussion with antitrust expert Glenn Manishin.

According to Manishin, the likelihood of Alphabet facing a forced breakup or significant fines in its ongoing legal battles is minimal.

Manishin, a principal at ParadigmShift Law, brings a wealth of experience, having been counsel-of-record in landmark antitrust cases such as United States v. AT&T Inc (NYSE:T ) and United States v. Microsoft Corporation (NASDAQ:MSFT ).

His insights provide valuable perspectives on the Department of Justice's (DOJ) antitrust case against Alphabet, particularly in regard to Google's ad tech platform and search business.

According to Manishin, Alphabet is not expected to undergo a forced breakup or face major fines. Unlike the divestiture of AT&T's Bell Systems in 1982, such drastic measures are unlikely in this case.

The last forced divestiture was that of Standard Oil in 1911. Furthermore, the US Government lacks the authority to impose significant fines on antitrust violators, contrary to practices in other jurisdictions.

The antitrust case could take a long time to resolve, potentially spanning three to eight years. Manishin anticipates that the judge will take nine to eighteen months to propose remedies, after which Alphabet would likely appeal.

This appeal process would benefit from several factors, including rising AI competition, potential changes in administration, and historical legal theories that do not view capital as a barrier to entry.

Alphabet's network effects are expected to play a crucial role in mitigating risks. Manishin draws a parallel to Microsoft's historical strategy of paying OEMs to preinstall Windows, leading to enduring network benefits even after such payments ceased.

Similarly, even if the judge bans payments from Alphabet to Apple Inc (NASDAQ:AAPL ) to be the exclusive search provider, Alphabet's strong network effects could ensure it remains the search engine of choice, potentially leading to margin benefits.

Manishin posits that Google's advertising platform case, which is set to commence on September 9th in the Eastern District of Virginia, could have more significant financial implications than the current search-focused DOJ case.

The judge in this case might order behavioral remedies or even mandate a spin-off of the ad-tech business from the search business, thereby reducing Alphabet's dominance in the ad tech sector.

Stock Valuation and Outlook

Despite the legal challenges, Jefferies analysts find Alphabet's current stock valuation attractive. Over the past month, Alphabet's stock has dropped 8%, compared to a 1% decline in the NASDAQ Composite (COMP).

The stock trades at an 11.6x forecasted CY25 enterprise value to EBITDA ratio, which is favorable compared to its 10-year near-term mean average of 12x.

Source: Investing.com