Protecting Your Alphabet Position as Regulators Close In
In FY2024 the company generated $350 billion (bn) across four segments. Google Services is the biggest contributor to the total revenues ($ 304 bn) spread between: (i) subscriptions, platforms, and devices like Pixel phones ($ 40 bn - 11% of total); (ii) advertising makes up the biggest chunk of sales ($ 264.6 bn).
Then comes the fastest growing segment of Cloud (or GCP - Google Cloud Platform) with $ 43 bn - 12% of total - as per FY2024.
Minor contributions come from Hedging activities with $ 0.2 bn. The last revenue stream is perhaps the most fascinating yet less disclosed: Other bets, which generated more than $ 1.6 bn (or 0.5% of total sales) and includes promising businesses like autonomous driving venture Waymo, and life sciences business Verily.
The position as one of the world's influential tech conglomerates costs Alphabet Inc. numerous, high-stakes legal battles to challenge its business practices and market power.
The scope of the present writing is to shed some light on the direct and indirect impacts of these legal challenges and offer a strategy to play the short- to mid-term impact those may have, via options.
The company discloses its legal battles into four types: (i) antitrust matters (the subject of this writing as it is the most substantial charges); (ii) privacy matters (e.g. for use of localization and biometric data); (iii) patent and intellectual property claims; (iv) other that are deemed less impactful (as litigation relating to Russia).
For the antitrust matters, the table below summarizes the main litigations since 2017, divided by segment (i.e. Shopping, Android, AdTech, Search, Google Play, DMA), with the correlated timeline and monetary impact.
In general, a case against GOOG can be estimated to last around 5 to 7 years. The average compounded in the table above accounts for just only one final judgment, while all the others are still in the judgment process ranging from 1 to 6 years.
The only (recent) final verdict (EU vs. GOOG of Jun 2017) did cost the company $3.0 billion and 87 months in court. During those 7 years and 3 months, the Company managed to adapt to the likely post-sentence scenario and reported the amount of the plausible fine as an expense in its financials earlier before it was real. That is an example of correct reporting, with the application of the principle of prudence.
Two are the most notable cases, both lasting since Q4 of 2020, hence a little more than four years.
First, State AGs (U.S. - E.D. Texas) vs. GOOG started in December 2020, with trial scheduled for August 2025. Alphabet and Facebook (now META), named a co-conspirator, are accused of having harmed competition through unlawful agreements to rig ad auctions and to fix prices.
Second, DoJ & State AGs (U.S. - D.C.) vs. GOOG started in October 2020, where District Judge Mehta found that Alphabet is a monopolist, and it has acted as one to maintain its monopoly. Remedies hearing ended in May 2025, and a final ruling expected by the end of August 2025.
The DoJ has proposed several remedies, including the divestiture of Alphabet's Google Chrome web browser or restrictions on Alphabet's Android OS to prevent it from favouring its own search services.
Alphabet already expressed its intention to appeal - yet it has to await a final verdict. Indeed, the stakes are quite high.
Every case is on a standalone basis. It is not possible to make accurate predictions on such subjective matters. Yet history can be a guide.
The landmark United States v. Microsoft (MSFT, Financial) case in the late 1990s accused Microsoft of illegally bundling its Internet Explorer browser with Windows to crush competition (i.e. Netscape). While the initial ruling ordered a breakup, this was ultimately overturned on appeal. Microsoft settled, and many argue this inadvertently paved the way for the rise of competitors like GOOGL. From the first legal investigation (1990) to the final resolution (2002), 13 years passed. Was it a lost decade for MSFT? Stock performance can be used as a proxy of investor and fact appraisal. From 1990 to 2002 the price return was +4,500%. What followed 2002 though, was the lost decade for MSFT, a null price return for almost a decade. The subsequent stock performance, nonetheless, has been astonishing, +1,800% since 2012 (a CAGR north of 25%/year).
Several reasons can be found for that, yet possible takeaways are: (i) that historical precedent will be dissected by both parties in the US vs. Alphabet case and rightly so, (ii) courts in the first sentences tend to overestimate the remedies perhaps as a bargaining lever, and (iii) legal actions are expected to last between 5 to 10 years. Lastly, (iv) given the rapidly changing environment of the tech in question, investors should focus their reasoning/best judgment on whether the plaintiff's theory will remain the same in the coming years or if the scenario could change.
Search business has been pivotal in Alphabet's ascent, is crucial at the moment but will it lower its impact? Will competitors rise in this space? If that is the case, will Alphabet adapt to find new profitable business streams (e.g. cloud services, cybersecurity, autonomous driving)?
Another historic case is US v. AT&T which was settled in 1982 and began around 8 yearsearlier. The result was drastic: the breakup of the telecommunications giant into seven regional "Baby Bells. That spurred significant competition in the long-distance market, but the investor ended up with a 14% yearly CAGR (from 1983 to 2002 vs. 11.2% by the S&P500). And several pundits argued that the ruling led to weakening the US from a national security point of view, as the current infrastructure is more and more dependent on foreign suppliers and operators. Is this a desirable outcome for the current Administration? Can that be a winning argument for the Alphabet case as well?
Here are briefly presented news and a comment regarding the upcoming august trials.
(i) Regarding the Texas judge that found Alphabet and Meta (then Facebook) to be co-conspirator in the ad tech space, Alphabet asked the judge to postpone the case by 60-days. That will allow for a similar case brought by the DoJ to be discussed starting Sept 22.
(ii) The most compelling verdict is expected by the end of August. This is the DoJ case in which Alphabet has been found to be a monopolist in the search space. Judge Mehta at closing arguments in May 2025, outlined three types of remedies: inductive remedies, forward-looking remedies, structural remedies. Injunctive remedies would be behavioral hence less harmful to top and bottom line (e.g. stop paying to be default search on Apple's devices). Similarly it goes for forward-looking remedies that could require to share data with competitors. There may be several ways in which this could harm Alphabet yet it could be easier for them to comply with that request while protecting their hedge. Last, but not at all least, is the asked spin off of Google Chrome. Perplexity and OpenAI have shown interests to bid for the future company. Alphabet can obviously be damaged by that in a big way. My view is that value can be generated even from a spin off since the company is worth around 20% more on a sum of the parts basis than as an aggregate.
Nonetheless this last option is the least probable, indeed Judge Mehta said: We're not looking to kneecap Google.
A loss in an antitrust case generally comes with three consequences: (i) remedies that force changes to the business structure/operations; (ii) financial sanctions; (iii) reputational damage.
Let's analyze the last two items, given that remedies are unique for every case.
Financial sanctions frequently arise from antitrust cases. During these circumstances, Alphabet adopts its better judgment to estimate the most likely numerical cost and then account for that in the financial statements. Legal fees are expensed in the period they occurred, while fines are recorded both in the balance sheets and cash flow statement (under accrued expenses and other current liabilities). The number is recorded even if the trial is under appeal.
Given the time elapsed from the first injunction to the final decision of legal actions, GOOG can de facto use the capital to mitigate the direct financial impact of the fines. On a theoretical, yet elegant, ground, capital has the possibility to double or quadruple over the period the court has reached the final ruling. Alphabet has an exceptional ability to generate high returns on invested capital and total capital (ROIC and ROTC). Historically, those figures ranged from 20% to 30%. Assuming an average length of trial of 7 years, that would mean doubling the capital once (at a rate of 10%), twice at 20%, and thrice at 30% - using the simple heuristic Rule of 72.
This, of course, doesn't mean the economic damage is zero.
A different story must be told about reputation. The label of monopoly or anti-competitive business could generate substantial damage. The main detrimental effect could be on lasting mistrust on new generations, leading to lower business appeal and hence hardship in attracting talent.
Meta (formerly Facebook) undertook a major rebranding in part to offset the controversies around the social media scandals of the 2015-2018 with the Cambridge Analytica data misuse. Since 2021, Facebook is part of a revised parent company named Meta Platforms (riding the hype of the moment, with the metaverse enthusiasm).
What will happen if Alphabet has to spin off Chrome is anyone's guess.
The moat they are enjoying at the moment is very high, think of user inertia, Googling is synonymous with searching. Nonetheless, the AI revolution is here even in the LLMs everyone is experiencing right now. A growing number of research projects are being done on ChatGPT for fashion, ease of use, and quickness of responses in an increasingly dynamic world. A divestiture order may come late and have to confront the new reality that could be a shift in searching happening directly on LLMs like ChatGPT or Google's Gemini. The transfer of trust in Google (hence its moat) to Gemini could come faster than expected.
As a bonus, Alphabet is testing advertisements on its AI tool Gemini. Hard data on conversion and profitability of this (potentially) game-changer move is still absent, yet the management team has expressed very positive sentiment - only subjective data though.
A possible risk here is a massive data breach. If that come, Alphabet would lose a bit of traction in adoption of its ecosystem.
Speaking of which, Alphabet has several other growing businesses. The present paragraph is not intended to be complete, but to ignite meditation.
Search and other accounts for 65% of total sales. Let's also include Google Network that is basically the revenues made to show ads on apps and sites not owned by Alphabet, bringing the total to 75%.
The remaining quarter comes from Cloud (14%, growing at an annual rate of more than 30% with increasing margins), YouTube Ads (12%), and Other Bets (0.5%).
YouTube Ads generated $36 bn in the last fiscal year - 23% CAGR over the last 10 years. Netflix (NFTLX) generated $39 bn - 21% CAGR over the same period. NFLX's $479 bn market cap implies a P/S of 11, higher than the decennial average of 8.2. At these multiples - perhaps a bit magnified - YouTube would be valued between $ 295 bn and $ 396 bn. That's just 12% of sales of Alphabet.
Then there is the Other bets segment that includes several ventures like Waymo, Verily, AlphaFold (protein folding prediction model), and some VC investments made decades ago like SpaceX. Specifically, this one does not appear in any public filing, yet a significant purchase was done around 2015 for a stake of approximately 10% (shared with Fidelity investment).
Overall, the capital allocation of the Alphabet management team has been solid, with the benefit of a long-term horizon rested on the tranquillity of having a near-automatic cash-flow positive machine. They recognized the risk of concentration in advance and actively pursued diversification.
The last move in this direction is the agreement to acquire Wiz, the cybersecurity firm. An hyper-online world like ours will probably need more online security; it is one of the next waves.
On September 22, 2025 a remedies process is scheduled to start. Given the fact that a date has been set, options can be useful. As a reminder you can either use American or European style options depending on the preference of having the flexibility to exercise on any day before expiration or just at expiration date. The option price is a function of several factors, in particular time and volatility plays a key role. For the purpose of the strategy these are the most important aspects.
30-day Implied volatility (IV30) on GOOG is trending lower thanks to subsequent recent positive movements in the stock price in recent days. At 26.5 the IV30 is around the 40% percentile rank, -8.9% below its 20 day moving average of 29.1 . Lower volatility means lower expected price swings, hence lower option prices.
Considering the fact that every news related to the upcoming September trial is expected to be perceived as bad by the market, an investor may want to buy a long put with a bit of time cushion, let's say 3 weeks, hence mid October. This strategy will enable the buyer to either (i) hedge a direct equity exposure on the underlying stock, (ii) speculate on the downside movements.
Let's take for example an out-of-the-money long put expiring on Oct 17, 2025 with a strike price of $160 (GOOG251017P00160). The cost (option premium) is $8.55 at the time of writing, making the breakeven point around $151.45, perhaps a bit lower when accounting for transaction costs varying from broker to broker.
Let's assume the case (i) of direct equity exposure to say 100 shares. This means that the buyer is paying a 5.11% insurance premium on the current stock price ($167.43) to cap its losses. In particular, gains over the current stock price are lowered by the same factor of 5.11% (e.g. a stock price of $217, meaning a +30% from today's value would result in a +24.89% net performance - red line and red bars in the charts below). Yet, notably, losses are capped. The amount would result in a maximum loss of -9.54% (as displayed in the charts below, with the blue line and the blue bars).
An investor could also play the uncertainty even via an option-only strategy (ii). Buy the long put option with a fraction of the cost of the total exposure to the underlying (i.e. with only 5.11% of the total capital), saving the remaining 94.89% to fund future acquisition in case the price will tank and hence buying at a discount.
Notably both strategies involve time risk. Options are not perpetual and expire worthless after the expiration date, making it sensible to possible delay in trail beginning and other unforeseen events.
The same strategy could consider also the final verdict on a sterpate legal case expected at the end of August, not deeply explored in the present article for the sake of readability.
The main rationale to this strategy is to try to moderate short-term price drop due to downside scenarios. In particular judges can force Alphabet to share data gathered via Google Search which could lead to margin compression in its very profitable ad-tech segment.
Alphabet is facing significant headwinds with the antitrust challenges. Its Search and AdTech businesses are under attack, being sentenced as monopolies. Some restructuring can be due. Nonetheless, given the generally long court time and good capital allocation management, the company could absorb direct financial impact even on substantial fines. The greatest risks lie in likely forced divestitures that could come with reputational erosion. That said, Alphabet is not stagnant. Strategic moves made in the past could soon start yielding their results (e.g. Waymo, AlphaFold, SpaceX). The recent significant commitment to cybersecurity, with the Wiz acquisition proposal, could prove a winning path for future growth.
An investor can position its capital to profit from upcoming uncertainty using long put options. Indeed those derivatives are priced favorably given the recent low volatility observed in the stock price.
This article first appeared on GuruFocus.
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