'Magnificent Seven' investing playbook: Google’s antitrust battle comes at a 'pivotal time,' analyst says

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Now that summer’s coming to an end, that means it’s time to pull out your scarves, grab a pumpkin spice latte, and reassess your tech stocks. This series helps you decide what to do with your shares of the biggest names in tech — Apple, Alphabet, Amazon, Microsoft, Meta, Nvidia, and Tesla — known as the Magnificent Seven. Next up is Google, as the tech giant’s antitrust battle kicks off.

It’s an odd moment for Google parent Alphabet (GOOG, GOOGL) to be facing an antitrust trial since its business is more vulnerable than it’s been in a long time.

In one of the biggest challenges to Big Tech’s dominance in decades, the court battle, which kicked off Tuesday, will set out to determine whether Google illegally abused its power to protect its online search monopoly.

While the federal government alleges Google has too little competition in search, some experts see the company wrestling with growing competition in other areas, particularly in AI and for consumers’ attention.

“Google is a company in transition, and it’s not a transition of their own choosing,” D.A. Davidson senior software analyst Gil Luria said, referring to the hype around generative AI. “They have the advantage of developing the best tools possible in their lab, but now they’re scrambling to see if they want to commercialize it and how they want to commercialize it.”

“This is going to be a pivotal time where they can either switch their business model and become successful or fade into the background,” Luria added.

The Google sign is shown over an entrance to the company's new building in New York on Wednesday, Sept. 6, 2023, in New York. (AP Photo/Peter Morgan)The Google sign is shown over an entrance to the company's new building in New York on Wednesday, Sept. 6, 2023, in New York. (AP Photo/Peter Morgan)

The Google sign is shown over an entrance to the company’s new building in New York on Wednesday, Sept. 6, 2023, in New York. (Peter Morgan/AP Photo)

ChatGPT a ‘wake-up call’ for Google

Luria explained that Google was “humming along” nine months ago. The tech giant’s core advertising business was doing well and its generative AI, confined to a lab setting, was ahead of the curve.

“Then, they woke up one morning and they tried ChatGPT like all of us, and it was a wake-up call,” Luria said.

In short, Google’s entire business at the intersection of advertising and search probably needs to change. The question is how.

“Google is in this really big transition, deciding whether they want to change how people do search, and, if they do, how they sell ads that way,” Luria said. “How do we sell ads if you’re chatting with a computer as opposed to searching? Can I put sponsored links on top? Can I use my algorithms to control what you see? It’s different, so how do I adapt to that? That’s the point in time that Google is at right now.”

How Google manages its advertising business in the AI-facing world is its future. In July, Google reported second quarter revenue of $74.6 billion — $58.14 billion of which came from Google ad revenues. YouTube ad revenues also topped estimates, shaking out to $7.66 billion.

As this trial gets going, Luria isn’t alone in thinking Google has serious competition.

Though the FTC case revolves around whether Google abused its monopoly in online search, Tema ETFs chief investment officer Yuri Khodjamirian isn’t sure that’s the case. He manages the Tema Monopolies and Oligopolies ETF (TOLL) that hunts for real durable long-term monopolistic businesses.

And Google just doesn’t fit the bill, Khodjamirian told Yahoo Finance. Ultimately, Google, like all tech companies, is in a cutthroat fight for your attention.

“Our view is that it’s very difficult to call technology a real durable long-term monopoly,” Khodjamirian said. “Technology is synonymous with disruption, and because of that we think that it’s difficult to maintain a competitive advantage.”

“So many companies have pivoted their models to focus on advertising — a great example is Amazon,” Khodjamirian added. “All these companies, they’re all converging on the same market, so it’s hard to say that it’s not competitive.”

What should you do with Alphabet stock?

Google stock is up about 54% year to date.

When it comes to the antitrust trial, that will be for the FTC and Google to hash out.

However, the bottom line from Wall Street is that, from a stock perspective, Google has room to run — and lots of competition overall. Currently, Wall Street analysts’ recommendations break down to 10 Buys, two Holds, and zero Sells under the GOOG ticker and 54 Buys, eight Holds, and zero Sells under the GOOGL ticker.

If you’re trying to gauge where Alphabet could land over time, keep an eye on its AI integrations, Luria said.

“How well are they incorporating generative AI into the core search functionality?” he said. “How well do they have the ability to monetize that new type of search? They’ll figure out everything else, they’re very smart people. But those two questions are monumental, because this is, again, where they generate most of their revenue.”

Even if Google manages to get that right — and it could, given that it’s incredibly well managed — the company will continue to play defense given its dominance.

“Google obviously has a large market share, but there’s just this risk of disruption all the time,” Khodjamirian said.

Allie Garfinkle is a Senior Tech Reporter at Yahoo Finance. Follow her on Twitter at @agarfinks and on LinkedIn.

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