• Google Cloud a potential target for separation
• Digital infrastructure, AI capabilities are core focus

A breakup of Alphabet [NASDAQ:GOOGL], the parent company of Google, could be beneficial to its stock, according to market participants and analysts.

This comes as a US federal judge found that the Mountain View, California-headquartered company illegally sustained search and text advertising monopolies, which could lead to regulatory action prompting a separation of some of its assets.

There are no signs yet that the company will embark on a review; however, industry advisors are already carefully targeting the best opportunities that Alphabet could take in the event of a voluntary or involuntary separation.

One sector advisor said that “there is an argument that its parts are worth more individually than they are as a whole,” and that a breakup could unlock value for shareholders.

Some have suggested the company could consider a potential spin-off of Google Cloud, which is seen as having the right operational maturity and financial strength to be spun off as its own unit. The sizable significance of the unit may allay the concerns of regulators eager to see the business broken up.

Robert Hodgins, fund manager at Sand Hill Road Technologies Fund, noted that a Google Cloud spinout could allow the company to focus more on efficiency and profitability as a standalone entity, potentially making it a more competitive force in the cloud market.

Along with unlocking shareholder value, he said, it would allow investors to directly invest in Google Cloud’s growth potential. Additionally, as a standalone company, Google Cloud could attract specialized talent and investment, positioning itself for more aggressive strategies in a highly competitive industry.

“From the perspective of Sand Hill Road Technologies Fund, which focuses on large-cap private equity and late-stage companies, a Google Cloud spinout could be an attractive investment opportunity,” he said.

Hodgins noted that the business continues to trail behind Amazon’s [NASDAQ:AMZN] AWS and Microsoft’s [NASDAQ:MSFT] Azure in market share.

Rosario Mastrogiacomo, VP of strategy and solutions engineering at SPHERE, agreed that spinning off Google Cloud could present a significant business opportunity.

Spinning it out “as a completely independent entity and putting an enterprise software or platform veteran at the helm can only help make the case that the business is here for the long haul and it’s not going to be another Google+, Stadia, Google Wave,” he said, referring to previous innovation projects Alphabet embarked on that later lost traction or were discontinued.

In the case of Google Cloud, and its database and analytic services, the unit could be compared to Microsoft’s cloud business or even Oracle [NYSE:ORCL], the sector advisor explained.

“One sum-of-the-parts valuation pegged Google Cloud as a USD 730bn business. Its search business is valued at more than USD 1trn. When you add in its other businesses, the total valuation exceeds its current market cap,” he said. Alphabet’s market cap is currently USD 2trn.

A key unit

Still, Google Cloud is seen as a key component in Google’s growth trajectory for the coming years.

While it makes sense for Alphabet to rationalize its portfolio, Google Cloud is still a very strategic unit, an industry consultant noted. The valuation in terms of a split would justify value creation purposes but this unit is so germane in terms of its ability to diversify Alphabet’s business that such a move would be akin to “Amazon spinning off AWS,” he argued.

In an earnings call, Alphabet CEO Sundar Pichai said the company’s cloud business crossed the ten-billion-dollar threshold in revenue for the first time in its latest quarter, reaching USD 10.3bn. Google Cloud’s revenue increased 28.75% from USD 8bn in the same period a year ago, fueled by demand for AI infrastructure, he said. Google Cloud’s revenue in 2023 was USD 33.1bn.

Rising revenue, scale, brand and C-level talent could make the cloud business a great public stock, according to Mike Ryan, CEO of software company Bullet Point Network, who still harbor doubts that Google Cloud will be involved in a strategic review.

By contrast, it is expected that in the event of a review, Alphabet could explore separations from “more exploratory units” and innovation projects, he said.

The industry consultant said self-driving subsidiary unit Waymo could be a potential spin-off target, a view shared by the sector advisor. The business is seen as way less core to the company’s strategic direction, especially at a time when Alphabet will need to put a lot of its internal investments toward artificial intelligence development.

“Other experiments all of a sudden, the ones we would call innovation projects, are going to have less gravity in terms of their ability and appeal to keep them within the fold,” he said, citing the example of Intel’s [NASDAQ:INTC] spinoff of Mobileye as a potential blueprint.

Alphabet will invest in building out digital infrastructure and AI capabilities, and cloud and IT services are a key foundation for this part of the business, he said.

There are yet no formal signs that Google’s parent will effectively kickstart a review of its assets. However, regulatory scrutiny is expected to increase in the coming months.

In the context of the upcoming presidential election, candidates have already expressed their views on the topic. For instance, Trump’s vice-presidential nominee, JD Vance, said in a recent Fox News interview that he wants to break up Alphabet, calling it “one of the most dangerous companies in the world.”

On the other side of the political aisle, Senator Elizabeth Warren and her fellow Democrats have made similar arguments. The company is too big and too powerful, they argue.

“Regulators have been coming for it and may force it to do things it doesn’t want to do,” the sector advisor said.

“Breaking the company up would take some of the heat off, reduce its regulatory risk and the fines that can come with it. It is certainly a possibility.”

Alphabet did not respond to a request for comment.