The Big Threat Hanging Over Google

If you’re lying awake at 3 a.m. one night, try reading the Justice Department’s 509-page “proposed finding of fact” in its antitrust lawsuit against Google’s search business, a revised version of which was filed with the court on Tuesday. You likely won’t make it past the extensive table of contents before you fall asleep. Even so, getting through the document is probably worth it, at least for investors in Google’s parent company, Alphabet.

For those people, understanding the government’s case is essential. A government victory could impose restraints on Google’s search business, its cash cow. And depending on what those constraints are, they could hurt Google’s earnings power enough to affect its ability to keep up in artificial intelligence.

We’re a long way from there, for sure, but a final decision on the case is getting closer. Today the judge overseeing the case heard closing arguments from both sides. Perhaps not coincidentally, Google stock was conspicuously flat even as the rest of the stock market rallied. Investors are surely conscious of the threat posed by the search case (which is separate from the antitrust lawsuit over Google’s ad tech business). And the earnings updates from major tech companies in the past two weeks help put things into perspective.

As much as we associate Apple with minting money, it actually generated less cash than either Microsoft or Alphabet in the March quarter. In fact, according to analysts surveyed by S&P Global Market Intelligence, Alphabet this year will generate more cash from operations—$131 billion—than either Apple or Microsoft.

The difference is that Apple returns nearly all of the cash it generates to shareholders, and the other two don’t. As we’ve talked about a lot this week and last week, Alphabet and Microsoft spend a portion of their cash on capital expenditures—things like servers and data centers, which are necessary for AI development—and return much of what is left over to shareholders. (It’s a bit more complicated than that, but you get the gist.)

This year, for both Microsoft and Alphabet, capex spending is soaring, so that balance will shift a bit. Apple, in contrast, can return so much money to shareholders because its capex spending is tiny. As Chief Financial Officer Luca Maestri explained on Thursday night during the company’s earnings call, Apple shares the cost of its capex investments with its suppliers.

The rise of large language models sparked worries last year that LLMs could hurt Google’s search dominance and profits, because AI-powered searches are so expensive to run. We reported this week that Google has slashed the cost of those searches, even as its search market share has stayed strong. The real threat to search, and to Google’s earnings power, remains the federal government.