In a note to clients published Monday, Morgan Stanley analysts discussed potential scenarios and financial impacts stemming from the Department of Justice’s (DOJ) antitrust case against Alphabet (NASDAQ: GOOGL).
The report outlines four possible remedies that could be imposed on Google, each varying in severity and impact on the company’s earnings before interest and taxes (EBIT).
Scenario 1
In the least severe scenario, Google would be required to remove exclusivity clauses from its distribution agreements and implement choice screens, allowing users to select their preferred search engine. Morgan Stanley explains this would lead to little change in Google’s business, estimating an EBIT impact ranging from +15% to -2% by 2028. Analysts believe consumers “will vote based on experience and brand … and small amounts of lost search revenue would likely be offset by lower TAC payments.”
Data from Europe indicates GOOGL has maintained 97%+ market share on mobile even with a choice screen implemented since late 2020, likely underscoring the minimal loss here. However, the judge is aware of this and seeks change, which is why this is viewed as the least likely outcome.
Scenarios 2 and 3
Here, Morgan Stanley outlines more substantial changes, including licensed access to Google’s data, auction pricing restrictions, and further removal of exclusivity clauses. Such steps are intended to level the playing field for competitors like Bing and GPT, potentially encouraging them to invest more in search technology. These scenarios are expected to have a more pronounced effect, with potential EBIT impacts ranging from +13% to -10%.
Scenario 4
The most severe scenario includes restrictions on Google’s ability to make payments to third parties for distribution agreements, along with the remedies mentioned in previous scenarios. This could enable competitors to outbid Google for default status on key platforms like iOS, resulting in significant traffic and revenue losses.
“This would likely be most negative to GOOGL, as it could enable MSFT (and others like GPT in the future) to better compete with GOOGL for placement and potentially exclusivity on iOS,” analysts note. Morgan Stanley estimates this could lead to an EBIT decline of up to 23% by 2028.
Given the uncertainty surrounding the case, Morgan Stanley anticipates Google’s valuation multiple will trade within a lower range of 17x to 20x price-to-earnings (PE) ratio, compared to its historical average of 21x. This implies a trading range of between $162 and $190 per share for GOOGL stock. As a result, the firm has lowered its price target for Google to $190 from $205, implying a 16% upside from current levels.
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