'Breaking Up Google Would Drive 10%-15% Upside' For Shareholders, Analyst Says

Alphabet Inc. GOOGL GOOG is setting the stage for a remarkable 2024, riding high on several strategic advantages and market trends. With a “Buy” rating from Needham analysts, Google stock is currently within striking distance of its 52-week high of $186.05.

The company’s forward momentum is buoyed by a promising macroeconomic backdrop, unprecedented political ad spending, and the integration of generative AI technologies that are expected to significantly reduce operating expenses and drive revenue growth.

Google – Top Large-Cap Stock Pick 2024

According to Needham analyst Laura Martin, Google is positioned as the top large-cap stock pick for 2024. Martin highlights Google’s commanding presence in the global digital advertising market, where it captured $237 billion in ad revenue in 2023, representing 38% of global digital ad spending. “Digital markets are ‘winner take most' markets, and Google has won,” Martin notes.

YouTube, LLM – Primary Growth Drivers For Google

A key driver of Google’s recent success is YouTube, which became the most-streamed site in the U.S. in the second half of 2023, thanks to exclusive rights to NFL Sunday Ticket. This surge in viewership has propelled rapid subscription revenue growth and diversified Google’s revenue streams. Martin points out that YouTube is now the largest social video advertising platform, generating “10x revs of TikTok”.

Looking ahead, Martin believes Google’s proprietary large language models (LLMs) will be the primary value driver over the next three to five years. Thousands of small and medium-sized businesses are developing applications on Google’s LLM platforms, with Google Cloud (GCS) poised to benefit from both the LLMs and the applications built on them.

“GenAI necessitates a continuous influx of millions of data points daily to maintain LLMs’ relevance, and GOOGL outpaces its competitors in data ingestion, leveraging its Search and YouTube platforms,” Martin said.

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Silver Lining In The Face Of Regulatory Pressures

Regulatory pressures might seem daunting, but the analyst sees a silver lining. She argues that Google is worth more in pieces than as a whole, and welcomes regulatory attempts to break up the company.

“We believe the EU will ultimately require GOOGL to spin off its 3rd-party network ad business,” she said. She also added that “YouTube would be worth $455B-$634B if separately traded, representing 20%-30% of GOOGL’s total enterprise value today.”

“Breaking up GOOGL would drive 10%-15% upside for GOOGL shareholders, as spinning off even 5% of YouTube would result in 8%/share of upside for GOOGL shareholders,” said Martin. Her estimates are based on the fact that investors typically pay more for pure-play assets. Additionally, increased disclosures and improved employee retention could further enhance shareholder value.

Overall, Google’s strategic investments in generative AI and cloud assets place it among the best-positioned companies in the S&P 500, according to the analyst.

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