In a note to clients published Monday, Morgan Stanley analysts delved into the 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.
The Wall Street firm believes this would lead to little change in Google’s business, estimating an EBIT impact ranging from +15% to -2% by 2028. This is because analysts think 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. But the judge knows this and wants change … which is why we think this is the least likely outcome,” they added.
Scenario 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 incentivizing them to invest more in search technology. Morgan Stanley expects these scenarios to have a more pronounced effect, with potential EBIT impacts ranging from +13% to -10%.
Scenario 4: The most severe scenario involves restrictions on Google's ability to make payments to third parties for distribution agreements, alongside the other remedies mentioned in the previous scenarios.
That 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 to bid for placement and potentially exclusivity on iOS,” note.
Morgan Stanley estimates that this could lead to an EBIT decline of up to 23% by 2028.
Given the uncertainty surrounding the case, Morgan Stanley anticipates that 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 the current levels.