Alphabet Gets New Target Price Thanks to Update on Apple Partnership

Good news for Alphabet GOOGL!

Shares of the Google parent are trading sharply higher on Wednesday morning after a ruling by a federal district court judge on Tuesday evening went about as well as could have been anticipated for the tech giant. That was from Judge Amit Mehta, who is the same judge that ruled back in August 2024 that Google did indeed maintain a monopoly in general internet search services and in general text advertising. However, a lot of water has passed under the bridge since then, my friends.

As Mehta wrote in his Tuesday night ruling, "The emergence of GenAI changed the course of this case."

AI chatbots such as ChatGPT, Perplexity and others have taken share as those using the internet seek help in finding information. Internet search traffic has been in decline and falling for most of this year. Alphabet's Google released a statement after the judge's opinion had been rendered:

"Today's decision recognizes how much the industry has changed through the advent of AI, which is giving people so many more ways to find information."

So...

After the judge's decision, Alphabet's Google:

Will not have to sell its Chrome web browser, the sale of which was almost expected
Will not be barred from paying Apple to make Google its default search engine
Will not be prevented from paying distribution partners to preload Google Search, Chrome and the firm's GenAI products.

That Said...

The firm will:

Be barred from entering into exclusive contracts that relate to the distribution of Search, Chrome, Google Assistant and Gemini
Will have to share specific search related data with competitors

Going Forward

This removes one giant negative overhang from Alphabet's short- to medium-term outlook. The company will not have to waste resources on the legal defense of what probably was a monopoly after that monopoly's dominance has already started to ebb. Now those resources can be put into the development of the firm's AI-focused product so that it can remain competitive as the playing field changes. This ruling probably also allows for a cozier working relationship between Alphabet and Apple AAPL, which is important due to Apple's huge installed user base.

This ruling is also a big deal for Apple, as Google pays Apple up to $20 billion a year to remain the default search engine on all of Apple's mobile devices. That's about 5% of Apple's total revenue and that 5% comes with little to almost no incremental costs to Apple, so it's a pure boost to margin.

Thoughts

How much of an overhang was this case for the shares of Alphabet?

The stock trades at 21 times forward looking earnings. Looking over the rest of the Mag-7, Amazon AMZN trades at 34 times, Microsoft MSFT trades at 32 times, Apple trades at 31 times and Meta Platforms META trades at 26 times. That's a lot of ground to make up. I did not include Nvidia NVDA and Tesla TSLA because they are different, but their shares are also much more highly valued than Alphabet's.

To be honest, though I have disclosed a long position in GOOGL below, I did not come into this event loaded up. That is just a small position left over from day-trading the stock overnight. I probably should be longer than I am though, and maybe retail investors that were not on top of this name should be.

Note that from late January into August, GOOGL developed a clearly defined bullish cup-with-handle pattern with a $106 pivot. Yes, the stock created a gap on Wednesday morning and at some point, that gap may fill, but this is quite the bullish setup.

Relative strength just blew the roof off of that indicator (above the chart). Below the chart, readers will see a very bullishly postured daily MACD. The histogram of the nine-day EMA is now significantly positive. The 12-day EMA is not only also in positive territory with the 26-day EMA, but the 12-day line is pulling away from the 26-day line. This is about as clean a chart as I get to analyze and it's notably bullish.

Alphabet (GOOGL)

Target Price: $252

Pivot: $206

Add: Down to gap fill

Panic: Loss of 50-day SMA

At the time of publication, Guilfoyle was long GOOGL, MSFT and NVDA equity.