Shares of Google (GOOGL) are trading more than 2% lower today as investors react to the announcement that the government may seek to force Google to divest some of its core businesses.
We saw a larger move on August 5 after a Federal judge ruled that Google had been operating as a monopoly based on the company’s powerful search business.
After the initial reaction to the news, investors have been looking for any guidance on where the stock is likely to head based on the news.
The answer is difficult, but history tells us that investors are wise to keep their eyes focused on the price action and the technical analysis of a stock when uncertainty like this strikes.
I’ll break down what’s going on with Google and what the charts say about whether you should buy, sell or hold Google shares right now.
Bloomberg reported today that the Department of Justice is considering a breakup of Google’s businesses.
The news focuses on a significant legal development where a federal judge ruled that Google acted illegally to maintain its monopoly in the online search market.
This decision delivered a major victory for the Department of Justice in its efforts to curb the powers of big tech companies.
The ruling highlighted Google's practices, such as paying billions to companies like Apple to set Google as the default search engine on devices, which, according to the judge, helped Google cement its dominance in the search market.
The outcome of this case is poised to have profound implications on the tech industry, potentially leading to changes in how Google operates its business or even requiring the company to divest parts of its operations
We’ve seen this before with another of the Magnificent Seven stocks, Microsoft (MSFT).
A federal judge ruled that Microsoft was operating as a monopoly on November 5, 1999.
The decision was part of a larger antitrust lawsuit filed by the U.S. Department of Justice, which argued that Microsoft had abused its market position in the PC operating systems market.
It’s not a big leap to call the two cases similar.
After a series of legal battles and appeals, a final judgment was issued in 2001.
The resulting judgment did not break up Microsoft, as the DOJ had originally proposed. Instead, the ruling imposed a series of other restrictions intended to curb the company's ability to abuse its market power.
These included requirements for Microsoft to share its application programming interfaces (APIs) with third-party companies to ensure they could compete in related markets.
This is where the similarities between Microsoft and Google hopefully ends.
Microsoft’s antitrust trial ran right through the .com bubble’s explosion.
The Nasdaq 100 lost nearly 75% of its value through that long-term bear market as companies like Microsoft, AOL and Intel had seen their valuations inflated by the introduction of the internet.
During that bear market, Microsoft lost 65% of its market value, less than the Nasdaq 100 Index.
Microsoft emerged from the bear market in 2003, after the Department of Justice’s settlement.
Some 20 years later, the company has outpaced the majority of the Nasdaq’s leadership with the exception of Apple (AAPL).
There are a number of options that are on the table for Google
This might include divesting the company’s Android operating system and Google’s web browser Chrome. The DOJ may also look to force Google to sell their AdWords business.
These moves would aim to permanently alter the competitive landscape by reducing the company's ability to exert control across multiple platforms or markets.
As with other antitrust litigation, the process is long and drawn out. It’s likely that we’re looking at 1-2 years before a definitive conclusion has been met between the DOJ and Google.
First and foremost, investors will see increased volatility in the first few weeks.
Last week, the antitrust announcement caused a 6% decline in Google shares over one day. That was the market’s first reaction to the uncertainty of the situation for Google.
Keep in mind that the Nasdaq 100 and other large cap technology companies have seen similar selling over the same period indicating that much of Google’s weakness comes from general market weakness.
This is one of those times that I stress to investors the importance of technical analysis.
Technical analysis follows the trends, not the headlines and uncertainty behind a stock. Price and the price trends are the only thing that can truly represent the market’s perception of Google, especially over a long-term period.
Google’s short- and intermediate-term trendlines have been in a bearish trend since the beginning of August.
From a short-term perspective, the large cap technology sector has hit the weakest seasonality trading period of the year. Historically, the months of August and September result in negative returns for the Nasdaq 100 and companies like Google 64% of the time.
That trend has formed a headwind for Google shares that investors should expect to see continue over the next six weeks.
Google shares are likely to drop below their 200-day moving average during this seasonally weak period, generating a longer-term buying opportunity.
From a long-term perspective, Google shares remain in a long-term bull market. This is not likely to change as a result of the ongoing antitrust proceedings.
From a long-term perspective, Google’s 20-month moving average is the line between a bull and bear market trend. That trendline is currently at the $135 price for Google’s stock. A break below that price will force the stock into a long-term bear market trend.
Despite the antitrust action, Google/Alphabet shares maintain their bullish outlook with a target price of $200.
Investors should expect to see volatility surrounding the company’s antitrust headlines, but that short-term volatility exists within the stock’s long-term bullish trend.
