RBC: Google is in the 'crosshairs' of antitrust regulators - and should be kicked out of FANG
- Google is facing heavy antitrust regulation risk from around the world.
- If hit by these regulations, the company could have to pay more to acquire users, putting a dent in its bottom line.
Google made headlines after it was served with the largest fine in the history of the European Commission, but it looks like that fine may not be the end of the company's troubles.
The fine from the European Commission for about $2.9 billion was levied because the company's search results for shopping queries were deemed unfair by the commission, and the company has until September 28 to change its products to comply with the ruling.
Intel was served a similar fine in 2009 when rebates it gave to its customers were deemed to hinder competition, but the company recently won an appeal, sending its case back to the lower court to be re-examined. Google, bolstered by Intel's victory, recently submitted an appeal. According to Mark Mahaney, an analyst at RBC, the company may have a chance to win that case, but it is still in regulatory hot water across the globe.
"Recent developments lead us to highlight Google as facing the greatest regulatory risk among Large Cap [internet stocks]. We are especially focused on the traffic acquisition cost expense risk raised by potential EU action against Google's Android system," Mahaney wrote in a note to clients. "Still, we are Outperform based on what we view as sustainable & scarce premium growth, significant option value and reasonable valuation."
The biggest risk that Mahaney sees to Google's bottom line and valuation is the rising cost of acquiring customers if several pending cases against the company are ruled in its opponent's favor. The company appealed one case it lost in European courts, but two others are currently in progress. The European Commission is looking into Google's dominant position in mobile through its Android platform as well as its dominant position as a search advertising power.
If Google loses these cases, it could face a fine, but it could also be forced to split up some of its current offerings, making them more expensive to get in front of potential customers.
For example, if Google is forced to allow other companies easy app store access on its Android operating system, acquiring users for its Google Maps or Youtube apps could become significantly harder.
"The rub here is that the potential next EU regulatory action may well involve forcing Google to 'unbundle' Android from its other services - Search, YouTube, Maps, etc," Mahaney explained. "This, in turn, could provide negotiating leverage to OEMs…and thus lead to potentially higher traffic acquisition cost expenses."
Google is expected to spend about $21 billion in 2017 to acquire its traffic, which is equivalent to about 22% of its revenue from Ad Sense, the company's biggest cash cow, according to RBC.
For every 1% increase in this traffic acquisition cost, Mahaney estimates the company would lose about $0.40 from its 2018 earnings per share, or about 1%.
Outside of the EU, Google is starting to feel the heat from antitrust talk. Democrats in the United States came out with their "Better Deal" platform earlier this year, which includes a plank aimed at empowering consumers by taking on the biggest "corporate monopolies," like Google.
Mahaney said several unnamed venture capitalists and silicon valley CEOs see antitrust as significant issue for the big tech companies in the future. Mahaney said a venture capitalist he spoke with suggested that antitrust action against Google may be "the first successful bi-partisan act in the US in 10 years."
The increased regulatory pressure, both in the EU and the US, is all hypothetical right now. Google may win all its cases in Europe and never face the wrath of Congress in the US. The risk is there though, as Mahaney points out, and it's the company with the most regulatory risk in the "FANG" tech group. Mahaney suggested that Google could be removed from the popular "FANG" acronym if it is hit with these regulatory issues.
He is still bullish on Google though and rates the company as a buy with a price target of $1,050, about 11.23% higher than its current price of $944.93.
Google is up 16.99% so far this year.
