Breaking up Alphabet, good for investors?
Alphabet shares two titles, both considered bad news; it is underperforming the broader markets year to date, even though it’s considered a forerunner in tech and part of the FAANG group. The second title is the title of most likely to be broken up by regulators, something that has been hanging in the back of the minds of investors but moved to the forefront as of recently. Any news at all of more potential antitrust risks has sent the stock falling, and with the breakup of big tech an area of debate for both political parties, the risk will only continue to grow. However, it may not be as much bad news as most investors think, as the breakup of Alphabet may offer larger gains long term.
Multiple Expansion Potential
This is the greatest potential reason for the breakup benefiting investors and should occur over the long term. This would allow for Alphabet’s many entities to receive different market pricing rather than as a whole conglomerate like currently. For example, a business such as Waymo, a leader in self-driving cars has no business trading at 6x sales, gets priced with the rest of the company, which mainly consists of digital advertising. With a breakup, these business lines would be able to trade closer to peers, rather than getting overlooked within the current conglomerate that is Alphabet. Finally, the breakup of certain units would allow for each new entity trading to go on different strategies for growth. For example, a cloud segment could continue to roll up other cloud software companies as google has of recently, with less regulatory closing risk and more direct impact with a smaller sized entity.
Buyback on Weakness
Since Alphabet has arguably the best balance sheet in the world with over 100B in net cash, any pullback because of breakup news would leave the company in a prime position to buyback shares aggressively. This would allow the company to be opportunistic and provide support for the shareprice in the short term while allowing the company to cancel shares at a discount for the long term. With all the cash the company is building up, it would represent an opportunistic time to finally return this cash to shareholders instead of just hoarding it and doing nothing with it to enhance shareholder returns.
A breakup of the combined company may force the company to start to monetize different aspects of their business in a more timely fashion, as well as make smarter potential investments when it comes to the other bet/venture side of Google. Examples include continued monetization of Android, Youtube, and Google Maps. These businesses have large runways to continue to grow, and with a greater focus paid to each in smaller entities, this will present more of a need to monetize, which will help fuel profitability. When it comes to the betting side of Google, a breakup may force the company to be more selective with its other investments in ways that will enhance shareholder value.
Ability to Appeal to Different Investors
Finally, to continue on the multiple expansion story, the parts of the new businesses will allow investors to choose different, more concentrated areas to invest in, which should lead to a premium overtime. In the past, investors wanting cloud computing exposure would be stuck getting a small amount of cloud exposure when buying Alphabet, so instead might look to a smaller player to fit their thesis. Finally, each business plan and use of capital will appeal to different investors alike, and this should lead to more choice for investors, whether it be to sell one part and double up on the other.
Is this isolated only to Google?
These upsides are not isolated just to Alphabet. While it is the prime example of a big tech conglomerate with its broad range of business segments. Similar opportunities could exist in breakups of other big tech firms, Facebook and Amazon.
Facebook currently comprises of three major platforms, Facebook, Whatsapp, and Instagram. Each with drastically different business models, growth profiles and margins. Platforms like Whatsapp are currently unmonetized while Instagram is presently outpacing the home Facebook platform in terms of growth as well as ROI for marketers, the lifeblood of social media monetization. Giving investors the opportunity to target exactly which platform their money goes.
Amazon also presents a similar opportunity but less diversity. Amazon is most known for its retail segment, Amazon.com. Your one-stop-shop for everything you need, want and those late-night purchases you definitely didn’t need or want. Amazon also has a rapidly growing advertising business bringing in roughly $10 billion. Most notably, however, they dominate the cloud business with Amazon Web Services, which commands roughly 32% of the cloud market, double the closest competitor, Microsoft. Again giving investors the opportunity to invest in each segment directly could be greatly beneficial.
Antitrust breakup, will it happen?
The likelihood of big tech actually being broken up remains slim. Speaking on “The Investors Podcast” John Huber of Saber Capital Management discusses the intrinsic value of Facebook and mentions antitrust concerns. Pointing out that, in the US, Anti-trust focuses on the effect of a monopoly on the consumer. Does the entity negatively affect choice and price that the end customer has access too, and in the case of big tech we don’t really see this. Amazon has broadened choice, convenience and lowered prices for all users. Google provides endless media and information for “free” and facebook connects all of us, again for “free”. “Free” in this case being the exchange of data for services instead of money. Overall the likely-hood of a big tech breakup is certainly a long and uncertain road, but should it be traveled down, investors are still to benefit.