Google’s shareholders had plenty to celebrate in after-hours trading on Tuesday, September 2nd, with the stock jumping 7% following what can only be described as a major legal victory after a federal judge ruled that Google won’t be forced to sell its Chrome browser as part of the antitrust penalties – a decision that removes one of the biggest clouds hanging over the tech giant. Separately, see – Buy META Stock Over Amazon?
Why This Matters More Than You Think
Let’s be honest here – losing Chrome would have been catastrophic for Google. We’re not talking about just another product in their portfolio. Chrome is absolutely central to Google’s business model, serving as the gateway that funnels billions of users toward Google’s search engine and, ultimately, its advertising goldmine. The browser’s value to Google? We’ve estimated it in the trillions. Investors were relieved when they heard this asset was safe.
That said, the ruling wasn’t entirely in Google’s favor. Judge Amit Mehta did put some guardrails in place, specifically blocking Google from entering exclusive search contracts like the lucrative deal it has with Apple. However, the company can still pursue deals that make Chrome the default browser option – a meaningful distinction that preserves much of Chrome’s strategic value.
Not Out of the Woods Yet
Before we get too carried away, it’s worth remembering that Google still faces another significant legal hurdle. A separate US court found last year that the company illegally monopolized online search and advertising markets, with the final verdict due on September 10. That’s less than a week away, and it could still pose meaningful risks.
Now, regulatory risk is just a small part of the risk assessment framework we apply while constructing the Trefis High Quality (HQ) Portfolio, which, with a collection of 30 stocks, has a track record of comfortably outperforming the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
The Valuation Story Gets Interesting
Here’s where things get particularly compelling from an investment standpoint. Google has been trading at a significant discount to its Big Tech peers, largely due to these regulatory headwinds. While Amazon trades at 35 times trailing earnings, Microsoft at 37 times, and Meta at 28 times, Google was sitting at just 22 times as of yesterday’s close.
This valuation gap never quite made sense when you consider Google’s fundamentals. The company has been firing on all cylinders lately – solid revenue growth, improving profitability margins, and a dominant position in search and cloud. The regulatory overhang was essentially the only thing keeping that multiple compressed.
Here’s the kicker: If Google’s valuation multiple were to rise to 35 times – similar to Amazon and Microsoft – it would translate into stock levels over $320, implying roughly 50% upside from current levels. We’re talking about potentially adding over $1 trillion to the company’s market cap. That’s not just a nice boost for shareholders; it’s a fundamental re-rating of one of the world’s most profitable businesses.
Of course, this kind of re-rating will likely have to wait for the September 10 ruling to provide more clarity on the regulatory front. And let’s be clear – there are still meaningful risks that could weigh on Google’s stock performance, which we’ve discussed in detail in our separate analysis on Google’s Valuation, Growth Drivers, and Key Risks.
The Bottom Line
Yesterday’s ruling feels like a turning point for Google’s stock. The company has been delivering strong operational performance while trading at a discount due to regulatory uncertainty. With one major threat now off the table, investors are starting to price in the possibility that Google’s valuation multiple could finally start catching up to its peers.
While Google is not completely in the clear yet – that September 10 verdict still looms – this development suggests the worst-case scenarios for the company may be behind us. For a stock that’s been performing well operationally but struggling with regulatory baggage, that’s exactly the kind of catalyst that could unlock significant value. See our take on Alphabet’s Path To 2x Growth.
Learn more about Trefis HQ strategy that has outperformed its all-cap stocks benchmark (combination of all 3, the S&P 500, S&P mid-cap, and Russell 2000), to produce strong returns for investors.