Google Breakup Could Unlock 20% Value, Says Deepwater Asset Management
Gene Munster, managing partner of Deepwater Asset Management, believes that a potential breakup of Alphabet Inc. (GOOG, GOOGL) could unlock significant value for the company. He suggests that separating Google’s ad network, considered the "ugly piece" of the business, could boost the company’s overall value by as much as 20%.
Key Takeaways
- Potential Breakup: Gene Munster, managing partner of Deepwater Asset Management, believes breaking up Google could unlock significant value.
- Ad Network Separation: Munster suggests separating Google’s ad network, which contributes 11% of revenue but has been declining and faces regulatory scrutiny.
- Value Unlock: Munster believes this separation could unlock 20% of value for Alphabet.
- Gemini’s Future: He believes Google’s AI division, Gemini, would likely be folded into the Search business.
- Cultural Shift: A breakup could re-energize Google’s departments by creating a renewed sense of urgency.
- Probability of Voluntary Breakup: Munster acknowledges that the likelihood of Google voluntarily breaking up is "exceptionally low."
- Regulatory Pressure: The potential breakup stems from the Department of Justice’s (DOJ) investigation into Google’s dominance in the search market.
- Shareholder Benefits: Analysts like Brent Thill of Jefferies and Dan Ives of Wedbush believe a breakup could benefit shareholders, despite their skepticism about its likelihood.
Separating the “Ugly Piece”
The potential breakup of Google has sparked discussions among analysts and investors. Munster’s comments are in line with speculation that the DOJ investigation into Google’s search market dominance could lead to regulatory action. While Munster posits that separating Google’s ad network would be the most likely scenario, he believes it could result in significant value creation for Alphabet.
"I think this could unlock 20% of value," Munster told CNBC, highlighting the potential upside of a separation. He emphasized that the ad network, despite generating 11% of the company’s revenue, has been in decline and has been a target for regulatory action.
"Where does Gemini fall in a potential breakup? And most likely that goes with the Search business, which is where… more than half the value is today," he said, suggesting Google’s artificial intelligence (AI) division would likely remain as part of the Search business after a potential breakup.
More Than Financial Benefits
Munster’s analysis goes beyond just the financial aspect. He also touched upon the cultural impact of a potential breakup: "I think the cultural aspect of this is actually really interesting. Google has lost some of its sparkle, and I think breaking up the company would actually reignite the urgency around different business segments."
He highlights that a potential separation could lead to a fresh start for Google’s various divisions, fostering a more competitive atmosphere and potentially boosting innovation.
Analyst Opinions: A Breakup, While Unlikely, Could Be Beneficial
While Munster believes a breakup could be beneficial, he acknowledges the low likelihood of Google voluntarily pursuing this path. The company’s leadership has consistently opposed calls for a breakup.
Other analysts share a similar view, with Jefferies analyst Brent Thill stating that a breakup “would be good for shareholders because the sum of the parts is greater than the whole.” Despite his positive outlook regarding shareholder benefits, Thill also believes a full breakup is unlikely.
Wedbush analyst Dan Ives agrees that a full breakup is "highly unlikely," but he predicts that regulatory pressure could lead to significant business model adjustments and stricter scrutiny of Google’s mergers and acquisitions (M&A) activities.
Market Impact and Future Possibilities
While Google’s stock price initially dipped following the DOJ investigation, it has since recovered. Nevertheless, the potential breakup scenario remains a subject of ongoing debate and market uncertainty.
Ultimately, the future of Google hinges on the outcome of the DOJ investigation and the company’s response. While a voluntary breakup seems unlikely, the potential benefits of separation for shareholders have sparked interest and continue to fuel discussions within the investment community. The potential for value unlocking and the possibility of a cultural shift under a breakup scenario remain key areas of focus for those closely watching Google’s trajectory.