Is Alphabet Stock a Buy Now?

Shares of Google parent Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG) were on an upswing earlier this year. The stock rose from a 52-week low of $127.90 last December to hit a high of $191.75 in July.

But in August, a federal court ruled that the way the company was conducting its business -- particularly in relation to Google Search, which it concluded was a monopoly -- violated antitrust laws, and Alphabet shares plunged. The stock was making a recovery when it fell again after the U.S. Department of Justice (DOJ) on Nov. 20 called for a series of changes that could dramatically alter Google's operations.

In the wake of its latest share price drop, is Alphabet now a buy? Answering that question requires unpacking the implications of the DOJ's proposed changes.

An end to Google's search dominance?

One key factor that supported the antitrust finding against Alphabet was its strategy of paying other tech companies such as Apple to make Google the default search engine on their devices. These deals have helped Google amass and keep a 90% share of the online search market.

The Justice Department's Nov. 20 proposal is part of the process as the court works to determine what penalties it will impose on Alphabet. An end to Google's third-party payments is one outcome DOJ would like to see.

However, even if that were to happen, it might not have a big impact on Alphabet's bottom line. That's because most of the revenue it generates from third parties flows back to these partners.

An end to such deals could lead to Google losing some portion of the search market -- and some revenue -- but otherwise, it would be unlikely to affect Alphabet's business substantially over the long term.

I don't believe consumers generally will stop using Google because it's no longer the default on their device. They could simply choose to download Google's search app, which is what many are already doing. The Google search app was downloaded more than 11 million times in July alone.

The bigger threat to Alphabet's business

What's more concerning for investors is that, in addition to ending third-party payments, the DOJ wants Alphabet to divest itself of both its Chrome browser and Android mobile operating system. Both dominate their respective spaces.

Chrome's share of the browser market stood at 65% in August. Apple's Safari was a distant second with an 18% share. Meanwhile, Android is the world's leading mobile operating system with a 72% share as of the second quarter.

Losing either business could be a significant blow to Alphabet. Both are part of its Google services segment, which comprised $76.5 billion of its $88.3 billion in Q3 revenue. Alphabet will file a counterproposal in December to avoid a breakup, and the case will continue into 2025.

But how likely are those sales to actually come to pass? A previous antitrust case similar to this one may provide some insight. In 1998, the DOJ won a major suit against Microsoft.

At the time, the tech titan had deals with internet service providers to favor its Internet Explorer browser over competitors. Microsoft was ordered to break up its business, but it successfully appealed the decision and reached a settlement. In the decades since then, Microsoft stock has skyrocketed.

If Alphabet can achieve a similar result, it's poised to do well over the long haul. In Q3, the company put up strong results. Its revenue grew 15% year over year to $88.3 billion, while its net income rose from $19.7 billion in the prior-year period to $26.3 billion. Its free cash flow was $17.6 billion, easily covering dividend payments of $2.5 billion for the quarter while leaving plenty of cash to put back into growing its business.

Evaluating whether to buy Alphabet stock

Alphabet's investments in its business are key to its future. It's investing heavily in artificial intelligence, which has the potential to power years of revenue growth. The company's burgeoning cloud computing business saw revenue rise 35% in Q3 to $11.4 billion.

That said, a court decision is still pending another antitrust case against Alphabet, this one targeting its digital advertising business. The implications are substantial: Alphabet generated $65.9 billion of its $88.3 billion in Q3 revenue from advertising. No ruling on that matter is expected until next year.

With these major court cases unresolved and Alphabet's future hanging in the balance, it would make sense if you want to wait until the dust settles before deciding to invest. But you may have to wait a while. Alphabet will doubtless appeal any unfavorable court ruling, so the antitrust cases against it could take years to resolve, according to the company's CEO Sundar Pichai.

But if you have a strong risk tolerance, now would be a good time to buy Alphabet shares. Because the stock is beaten down, Alphabet's price-to-earnings (P/E) ratio is lower than rivals Microsoft and Meta Platforms.

Data by YCharts.

The P/E ratio tells you how much investors are willing to pay for a dollar's worth of a company's earnings. Alphabet's lower P/E multiple relative to its competition indicates that its shares are a better value.

If you're willing to hold Alphabet stock for the long term, then given its reasonable P/E ratio and strong business, now would be a good time to pick up shares.