Google (GOOGL): Is the Door Open for a Strategic Buy?

Google Faces DOJ's "Aggressive" Proposals: What’s Next?

Alphabet Inc. (NASDAQ: GOOGL) (NASDAQ: GOOG) investors have struggled to find traction despite the S&P 500 (SPX) and Nasdaq (NDX) hitting new highs in November 2024. This suggests that market concerns remain heightened over potential regulatory penalties that could disrupt Google’s business model.

Over the past week, the Department of Justice (DOJ) escalated these uncertainties by threatening to require Google to divest its Chrome browser, among other measures. Google had already anticipated such moves, describing the DOJ’s proposals in an October 2024 blog post as "aggressive and sweeping." As the Mountain View-based giant gears up to contest the DOJ, the department's success in securing a guilty verdict against Google as an illegal monopoly remains a significant overhang.

Hearings are set for April 2025 to determine remedies, while a final court ruling isn’t expected until August 2025. Furthermore, Google is almost certain to appeal the verdict and the DOJ’s proposed remedies, indicating that the legal saga could drag on for years.

Alphabet CEO Sundar Pichai assured investors during the Q3 earnings call that the company will “vigorously defend” itself against the DOJ’s claims. He also warned of “unintended consequences” that such measures could bring, emphasizing the wide-ranging potential impact on Google’s leadership and its consumers. Given these risks, investor concerns are understandable. But has the market overreacted to the case? Or, has pessimism already been factored into the stock as the April hearing approaches?

The incoming Trump administration may adopt a "less severe" stance on Google, though this is far from guaranteed. Notably, the initial DOJ case against Google was launched under the first Trump administration, even as the Biden administration intensified its efforts. Moreover, the Tunney Act ensures judicial oversight in the case, potentially limiting the incoming administration’s ability to influence its outcome.

GOOGL Valuation: Attractive Despite Challenges

GOOGL’s “D-” valuation grade reflects its growth-driven narrative (with a “B” growth rating), despite its underperformance relative to the broader market since July 2024. Meanwhile, Wall Street analysts have raised their estimates following a strong Q3 report, signaling that the market hasn’t turned its back on GOOGL. The stock’s “B-” momentum rating—though downgraded from an “A-” over the past six months—indicates continued investor interest.

The market seems to recognize the fundamental strengths of Google’s ecosystem. While it remains cautious about the DOJ’s proposals, investors acknowledge the resilience of Google’s business model. Moreover, Google continues to enhance its integration of generative AI into key growth drivers such as Search (visual and multimodal), Google Cloud (35% YoY revenue growth), and YouTube monetization. At the same time, its planned increase in capital expenditures for 2025 positions the company to compete aggressively with Microsoft (MSFT) and Amazon (AMZN).

These moves have bolstered market confidence in Google’s operational execution (“A-” revisions grade), supported by its robust profitability. Wall Street forecasts indicate continued improvement in adjusted EBIT margins and revenue growth over the next two years, solidifying Google’s competitive advantages.

As a result, Google’s dominance is unlikely to crumble under the DOJ’s “aggressive” proposals. Even as the company exhausts legal avenues to contest the ruling, its market position remains fortified by growth in Google Cloud and the undervalued potential of Waymo, its autonomous driving and robotaxi business.

GOOGL Stock: Valuation Remains Reasonable

GOOGL’s valuation remains appealing. Its forward adjusted EBITDA multiple of 11.9x is lower than Meta’s (META) 12.6x, and its forward PEG ratio of 1.27 is over 12% below the median of the communication services sector (XLC) at 1.45. Bulls could argue that much of the pessimism has already been priced into the stock. While it doesn’t represent a deep-value play, this valuation suggests the market has refrained from severely penalizing GOOGL, recognizing its fundamentally solid business.

That said, the DOJ’s case could significantly hinder Google’s competitiveness in some areas. For example, Amazon has deepened its partnership with Anthropic, solidifying its position as the AI company’s primary cloud provider. In contrast, Google may face calls to unwind its early investments in Anthropic, potentially weakening its ability to compete effectively against its hyperscale rivals.

GOOGL Stock: Buy, Sell, or Hold?

GOOGL’s recent price action indicates that investors haven’t abandoned the stock, despite media reports painting a bleak picture. Since bottoming in August 2024, GOOGL has demonstrated a series of higher lows, culminating in a sharp rally after its October earnings report.

However, market sentiment has cooled in recent weeks, with recent volatility eroding some of those gains. Unless the stock sees sustained downward pressure that breaks through its August lows, betting against GOOGL might not hold much merit.

Dip buyers are likely to step in to reinforce the stock’s upward bias, which remains supported above its 50-week moving average. Consequently, the recent pullback presents a compelling opportunity for high-conviction investors to add to their positions. While the DOJ’s case may limit near-term valuation upside, the market’s confidence in Google’s core strengths and long-term growth potential remains intact.