Legendary tech investor Roger McNamee believes some or all of the FANG stocks should be broken up. Starting with Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) followed by Amazon.com, Inc. (NASDAQ:AMZN) and then the remaining trio of stocks that together represent $3 trillion in market cap.
Should owners of Alphabet stock be worried or excited by this proclamation? Do McNamee’s words ring true or are they merely wishful thinking?
“I would like Google to be broken up into eight or 10 different monopolies,” McNamee said while appearing on CNBC Feb. 22. “These companies have run unchecked for a very long time. The unchecked power produces really bad outcomes.”
My take is that McNamee’s on to something. When tech companies start resembling conglomerates, you know the pendulum’s swung too far.
The question is whether the five companies — well, probably four, because Netflix, Inc. (NASDAQ:NFLX) is only a video-streaming company that happens to make movies and TV shows to supplement its third-party content — will act proactively or be forced by the federal government to do so.
If they’re smart, they’ll take the former route and save taxpayers and shareholders a lot of money.
How Many Spinoffs Can Alphabet Stock Produce?
McNamee sees as many as ten different companies operating independently post-breakup. I’m not so sure it would get to double digits, but let’s consider what things might look like were something this monumental to happen.
Alphabet is currently divided into two segments: Google and Other Bets. Within both of those silos are many diverse and different businesses. The question becomes which of those entities can make money without the mothership providing capital and resources.
Here is where things get speculative.
Alphabet might be a public company, but the amount of information it releases is just enough to satisfy the SEC and other regulatory bodies. Let’s just say the rest of this article is purely conjecture.
Here, then, are some of the possibilities.
Google Ads/Search: This is the core of Alphabet’s business and not even McNamee is against Google’s monopoly in this area.
“I’m OK with Google being a monopolist in search,” McNamee stated on CNBC. “What I don’t want them to do is to use that power to eliminate pricing engines in Europe. I don’t want them to use it to make their photo search and all these other things,” McNamee told CNBC’s “Squawk Alley.”
According to Trefis.com, Google’s online ads and ad partnerships for search and content account for 80% of Alphabet’s share price.
To split the company in this fashion would mean businesses such as YouTube and Gmail would have to handle all of their advertising which could lead to higher expenses.
Everything Else Google: Both YouTube and Gmail would fall into this category in a post-Alphabet break-up. As I mentioned previously, this company along with the Google Ads/Search business would account for a majority of the value in a sum-of-all-the-parts calculation.
I assume it would enter into some sort of licensing arrangement with Google Ads/Search post break-up. That would increase the value of Google Ads/Search while diminishing slightly the value of Everything Else Google.
The current GOOGL stock price is $1,110. If you assume a 50% premium for a sum-of-all-the-parts calculation, these first two businesses would be worth $1,332 per share.
If we further assume a 65%/35% split between Google Ads/Search and Everything Else Google, they’d be worth $866 and $466 respectively.
That leaves $333 per share for the remaining six businesses which would include Google Fiber, Nest, Waymo, Verily Life Sciences, Google Ventures/Capital G and Calico/Moonshots.
Bottom Line on Alphabet Stock
For all of this to shake out it’s going to take some years to execute the hiving off these eight businesses. I have no idea whether it’s even possible, but if you own Alphabet stock, I believe this should excite you, not create any consternation.
Focused businesses always outperform.
If it doesn’t happen, I still believe GOOGL stock is worth owning, with or without a monopoly or three.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.