Why Google Stock Would Have Been Better Off With an Alphabet Breakup

Alphabet stock might be worth more in pieces than it is today. (Pascal Mora/Bloomberg)

Alphabet looks like it will survive a substantial antitrust-induced breakup attempt. That is a bummer for shareholders.

Tuesday, U.S. District Judge Amit Mehta released a relatively modest set of remedies to mitigate Google’s search dominance. Among the rulings, Alphabet won’t have to sell its Chrome browser. It also won’t be barred from paying Apple to make Google the default search engine on its devices.

Investors, somewhat sensibly, reacted with relief to the ruling. Alphabet shares rose 9.1% on Wednesday, closing at $230.66, while S&P 500 added 0.5% and the Dow Jones Industrial Average fell 0.1%. Shares traded as high as $231.31, a new 52-week high. The stock was trading down 1.7% at $226.85 on Thursday.

The ruling was good news. No one really wants the uncertainty and volatility that can come with extended legal fights. But Alphabet stock might be worth more in pieces than it is today.

Barron’s wrote positively about Alphabet stock in late November 2024, believing that a breakup, even one required by the courts, was nothing to fear. We believed a 50% gain was possible. Through Wednesday trading, shares were up 38% since the article appeared, outperforming the S&P 500 by 29 percentage points.

Alphabet, of course, has several important businesses beyond Google Search, including Waymo self-driving taxis, YouTube, Android-based electronics, and cloud computing.

Coming up with a sum-of-the-parts, or SOTP, valuation is more art than science. For starters, Alphabet doesn’t report numbers for each business. It organizes things by ad revenue, services, cloud, and “other bets,” which include Waymo. And there are no perfect comparables.

Still, Google Cloud can be compared to cloud players such as Microsoft and Amazon.com . YouTube comps include Meta Platforms and Netflix. Waymo and Tesla are battling it out for robo-taxi dominance. And Alphabet’s Android platform can be compared with Apple’s iOS platform.

Barron’s and Wall Street have suggested breakup values for Alphabet many times over the past year. Arriving at a $3 trillion-plus valuation wasn’t difficult and should surprise no one. Alphabet stock is still the cheapest of the Magnificent Seven, trading for about 23 times estimated 2025 earnings. The S&P 500 trades at 24 times. Apple, which is growing more slowly, trades for 31 times.

Created with Highcharts 9.0.1Price-to-Earnings Ratios for Select Technology Firms Source: FactSet

Created with Highcharts 9.0.1Current PE ratioA year agoNvidiaMicrosoftAppleAlphabetAmazonMetaNetflix05101520253035404550

The $3 trillion valuation might even be a little low, based on what’s happened recently. Netflix, Meta, and Tesla have all become more valuable, according to investors, over the past year. Netflix trades for about 46 times estimated 2025 earnings, up from 35 times a year ago. Meta trades for 26 times, up from 23 times. Tesla’s multiple has exploded—it trades for about 190 times estimated 2025 earnings, up from 98 times a year ago.

Based on those valuations, YouTube and Waymo could be worth a combined $1 trillion, or roughly $300 billion to $500 billion more than when some initial SOTP valuations were assembled.

However investors slice up Alphabet, there is still the job of valuing Google Search, which is being challenged by AI-powered chatbots such as OpenAI’s ChatGPT. Alphabet, however, has its own AI models and tools, including Alphabet-designed chips that work with Nvidia’s processors.

Don’t forget the chip business. “The Information is independently reporting Google has indeed started selling [chips] to clouds that are not Google Cloud,” wrote D.A. Davidson analyst Gil Luria in a Wednesday report. He said that supports his conclusion that there is significant value to be released in an Alphabet breakup.

Including Google Search, AI tools, and chips, Alphabet is worth a lot. Alphabet’s estimated 2026 free cash flow, which comes mainly from search, is almost $80 billion, according to FactSet.

What is more, AI valuations are soaring. OpenAI is worth an estimated $50o billion, up about 67% over the past year. It’s reasonable to argue that Google Search and Gemini are worth more today than they were a year ago. To be sure, there is more competition for Google, but there are also more applications for AI tools and more questions being asked.

SOTP valuations might feel like just fun with numbers, but they can actually be a good check on valuation and can help investors suss out hidden value in stocks.

Having said that, examining what Alphabet’s various parts are worth might not matter anymore. A breakup looks less likely. That might not be the best outcome for shares in the long run.

Write to Al Root at allen.root@dowjones.com