The "September gloom" of US tech stocks: In addition to NVIDIA, there is also Google's "antitrust" lawsuit

Can Google rebound in the new "antitrust" lawsuit?

On Wednesday, September 4th, the second trading day after the U.S. Labor Day, the U.S. stock market failed to rebound, with the "Tech Seven Sisters" mostly falling and Google A dropping by 0.58%.

Although Google has risen by over 15% this year, investors are still adopting a wait-and-see attitude - in September, Google will face a new round of antitrust lawsuits in court.

Morgan Stanley predicts that the U.S. Department of Justice will take a series of measures to break Google's monopoly in the search and advertising fields. These measures include removing exclusive clauses in RSAs, allowing users to make screen choices, limiting Google's payment capabilities in distribution agreements, etc. Google may also choose to further monetize Android devices, invest in and promote the installation of more Chrome/Google applications to reduce losses.

New round of antitrust lawsuits, new round of stock price headwinds

Google's first round of antitrust lawsuits began in 2020, with the U.S. Department of Justice jointly suing with 52 states and jurisdictions' attorneys general.

On August 5th this year, a U.S. federal court ruled that Google dominated the internet search field through unfair business strategies, violating antitrust laws. Specifically, Google's parent company Alphabet pays Apple $20 billion annually, making Google the default search engine on iPhones.

In the second phase of the trial, the federal court will decide what penalties to impose on Google. Google may appeal.

The well-known U.S. merchant review website Yelp seized this opportunity to accuse Google of leveraging its monopoly position in internet search engines to control the internet local search and internet local search advertising markets.

Google's second antitrust lawsuit is imminent.

The second antitrust lawsuit is scheduled to begin on September 9th, with some analysts calling it the "DoubleClick trial." In 2008, Google acquired the market-leading digital advertising company DoubleClick for $3.1 billion The U.S. Department of Justice claims that Google's dominant position in the digital advertising market harms advertisers and content creators.

This antitrust case will be heard in the Eastern District of Virginia federal court, presided over by Judge Leonie Brinkema. The media expects that the judgment of this lawsuit will be made no earlier than the end of 2024.

BMO Capital Markets analyst Brian Pitz believes that during this period, Google's stock may face short-term headwinds, leading to market speculation that Google will take a series of remedial measures. TD Cowen analyst John Blackledge stated in a report, "Ongoing legal actions require Alphabet to take long-term remedial measures, and Google may spin off one or more businesses."

On July 10th, Google's stock hit a new high of $191.75, but later retreated along with most tech stocks. According to recent trading data, Alphabet's stock may be consolidating. Some analysts point out that the trading multiples of GOOGL stock have decreased.

Morgan Stanley: Four Possible Outcomes of Google's Monopoly

Morgan Stanley believes that facing Google's monopoly in internet search and advertising, the U.S. Department of Justice is primarily focused on addressing three issues: competition intensity, data scale advantage, and anti-competitive pricing. Based on this, Google has listed four possible outcomes of this case, where the Department of Justice may take a series of measures to break Google's monopoly.

These measures would require Google to make several necessary adjustments, including canceling exclusive clauses in RSAs, allowing users to make screen choices, permitting access to Google's "click/query/user" data, controlling ad bidding pricing, and most importantly, limiting Google's payment ability in distribution agreements.

Outcome 1 (lowest probability): Allowing users to make screen choices and canceling exclusive agreements.

Consumers will choose search engines based on product experience and brand. Data from Europe shows that despite the implementation of screen choice at the end of 2020, Google still maintains over 97% market share on mobile.

Therefore, this measure has a minimal impact on Google's business. Morgan Stanley expects a -2% to +15% impact on pre-tax profit by 2028. The slight decrease in revenue for Google due to this measure may be offset by lower traffic acquisition costs (TAC).

However, the judge hopes to see a change in Google's monopoly in the internet search sector, so Morgan Stanley believes that the likelihood of the U.S. Department of Justice taking this measure is the lowest.

Outcomes 2 & 3 (higher probability): Further correcting Google's data advantage and anti-competitive pricing, encouraging competitors to invest in the internet search sector.

Morgan Stanley believes that taking a series of measures, including canceling exclusive clauses in RSAs, allowing users to make screen choices, permitting access to Google's "click/query/user" data, controlling ad bidding pricing, etc., would be more conducive to establishing a fair search competition environment and encouraging competitors to continue investing Under these measures, competitors in the search field such as Bing, GPT, etc. will continue to invest to drive differentiation in search engines, attract users, and have a significant impact on Google's pre-tax profits.

These measures may put pressure on Google's profitability in the short term, thereby accelerating Google's investment and innovation speed in search products.

Increased investment by multiple companies in the search field may also bring a better user experience, which is positive for society.

Worst-case scenario for Google (Result 4): Limiting Google's payment ability in distribution agreements.

Morgan Stanley stated that in the most severe scenario, in addition to the above measures, the Department of Justice may also propose restrictions on Google's ability to pay third parties, while allowing other competitors to freely bid.

This measure would have the most negative impact on Google, as it would allow companies like Microsoft to be more competitive in bidding for Apple's display positions, potentially even gaining a monopoly. Morgan Stanley stated that Microsoft has tried to win Apple's search contract, but due to Google's advantages in conversion rates, economic benefits, and user experience, Apple has repeatedly chosen to cooperate with Google.

Morgan Stanley: 3 self-rescue measures Google can take

Measure 1: Continue to innovate through Large Language Models (LLM) to enhance search potential and differentiation.

Morgan Stanley believes that future LLM-driven searches may become more visual, interactive, and video-oriented. Over time, these products may provide differentiation for users and distribution partners (including Apple), thereby cooperating with Google through licensing agreements.

Measure 2: Further monetize Android devices.

Currently, about 78 million Android devices (phones and tablets) are sold in the United States each year. Morgan Stanley stated that Google can adjust its policies to charge users in the U.S. market to use the Google Mobile Services suite, including the Play Store. In 2019, Google started a similar practice in Europe, currently charging fees ranging from $2.50 to $40.00 per device.

Measure 3: Invest in and promote the installation of more Chrome/Google applications.

Morgan Stanley expects that under the Department of Justice's measures, Google may lose the default setting for search engines, lose some traffic, and reduce traffic acquisition costs. In this case, Google may increase investment in app installation and paid marketing to guide users to use its applications