This week, we take a special look at Google. With the tech giant beginning its next antitrust trial on Monday, we believe this series of legal challenges could potentially reshape its business.
These lawsuits, led by the U.S. Department of Justice (DOJ), have raised serious questions about the company’s dominance in digital advertising. Accusations of anti-competitive behaviour, which include eliminating potential threats in the market, could force the company into making structural changes, or even face the risk of being broken up.
These legal challenges aren’t isolated. Alphabet, Google’s parent company, lost a $2.7 billion appeal in the European Union for favouring its shopping services over competitors. Despite Alphabet’s efforts to comply with regulatory rulings since 2017, these cases represent a continued threat to its business model.
Should the DOJ win these cases, it may push for measures that could reshape the entire structure of Alphabet. This, of course, could severely disrupt its strong position in digital advertising.
Despite this, Google’s resilience in its core business areas remains. Google Search continues to generate good revenue growth, contributing $48.51 billion in Q2 2024 alone. Despite a rapidly growing AI space, this, if anything, reflects Google’s capacity to withstand increasing competition from emerging technologies such as ChatGPT and Bing AI.
Google Cloud is also seeing rapid growth. The segment achieved a 38.9% increase in revenue in Q2 2024 compared to Q1 2023, turning a profit for four consecutive quarters. Investments in this division, especially on data centres and servers, have been substantial, but with the operating margin turning positive, investors are likely to remain bullish on its long-term potential.
Alphabet’s financial metrics remain strong across the board, which makes its stock an attractive consideration even amidst the legal uncertainty. It boasts a forward price-to-earnings ratio of 18.26, lower than its five-year average of 23.4.
Earnings per share (EPS) have grown steadily, expected to rise from $5.80 in 2023 to $8.67 over the next 12 months. Its free cash flow per share is also expected to increase from $5.46 to $6.64.
Given these numbers, Alphabet appears undervalued when factoring in its revenue growth trajectory and consistent share buybacks. The stock’s conservative valuation of $190 per share, with a high estimate of $210, suggests room for future gains.
Even with a 10% margin of safety, the lowest valuation is $171, implying a degree of protection for investors who enter at current price levels.
In the near term, Alphabet’s stock price may fluctuate as the DOJ’s cases unfold. A loss could lead to a short-term dip in the stock’s value, particularly if it leads to any form of restructuring. Investors may tread cautiously, but the long-term outlook for Alphabet remains positive if it can navigate these challenges.
We look back at the broader market performance this week.
The USD Index (USDX) could see further downside if it breaches the 100.38 low, indicating potential weakness in the dollar, which could support the value of other currencies like EUR and GBP. EUR/USD remains in a critical zone, with potential bullish action near 1.0970. GBP/USD is also poised for a possible recovery, with 1.2970 acting as a key level.
Oil markets, particularly USOil, have seen prices hover around $70, with consolidation likely before any major movement. Gold, trading near its all-time high, shows no signs of major reversal, with bullish sentiment likely to push prices beyond 2600.
On the equity front, the SP500 could be on the verge of another all-time high if it maintains bullish momentum near 5565.
Bitcoin continues to consolidate around the $58,100 level, hinting at a potential breakout in the near term. Natural Gas, on the other hand, is poised for further downside, with consolidation around the 2.168 level likely before another decline.
This week’s economic calendar presents us with several key events that could shape market movements. Aside from the progress of the Google antitrust case, we also anticipate data releases from the US, Canada, and major central banks.
On Tuesday, September 17, Canadian and US inflation figures will be in focus. Canada’s CPI is forecasted at 0.1%, a stark drop from the previous 0.4%. A lower-than-expected CPI could dampen expectations for further rate hikes by the Bank of Canada, which might put pressure on the CAD.
Meanwhile, the US will release retail sales data, forecasted to drop by 0.1% compared to last month’s 1.0%. If this plays out, it could suggest a softening of consumer demand, which may weigh on the USD initially, before potentially finding support from traders expecting the Federal Reserve to remain hawkish.
Wednesday, September 18 will see the release of the UK’s CPI data. The annual figure is expected to remain steady at 2.2%. A deviation from this forecast could spark moves in the GBP.
If inflation remains sticky or accelerates, it could reignite discussions around further tightening by the Bank of England, supporting the pound. Conversely, a lower print may increase speculation that the central bank will hold rates steady, applying downward pressure on the currency.
Thursday, September 19, will be an exceptionally busy day, with central bank meetings taking centre stage, especially the US Federal Reserve’s much-anticipated FOMC meeting. The market is pricing in a 25-basis-point cut, reducing the official rate to 5.25% from 5.50%. Any surprises, such as a more dovish or hawkish tone from the Fed, could result in high volatility across asset classes, particularly for the USD and equity markets.
Meanwhile, the Reserve Bank of New Zealand (RBNZ) is also set to announce its GDP forecast, with expectations of a -0.3% growth figure.
The Bank of England will also reveal its Official Bank Rate, which is projected to hold at 5.00%, but market participants will be closely watching for hints on future rate decisions.
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