Wall Street shrugs at Google’s legal setbacks isn't denial, it's pragmatism: Morning Brief

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It’s been a tough week in court for Google (GOOG, GOOGL).

A day after a California judge ruled the company has to open Android to third-party app stores, the Justice Department, in another case, said it may propose that the tech giant sell off a part of its business, like the Chrome browser or Android, to break up its search dominance.

And how did Wall Street react to a potentially seismic event that could forever reshape the tech landscape? With a shrug — Google shares sank less than 2% Wednesday after the DOJ’s breakup recommendation.

Part of the muted reaction has to do with the sluggish pace of legal proceedings. Even if judges rule against Google in every subsequent decision, the ultimate adverse outcome is still years away. But Wall Street also wagers that such a drastic decision would be so difficult to implement and so destructive in its consequences that a more modest remedy is likelier.

Like separating conjoined twins, cutting off Google’s intertwined businesses poses immense challenges, and it almost seems hard to believe. And many still don't.

“The street is looking at this and thinking despite all the scary headlines and noise that the chances of a breakup are minimal," said Wedbush analyst Dan Ives.

Investors are largely looking past Google’s legal troubles, cleaving instead to Mountain View’s vision for growth, powered by its cloud business, AI initiatives, and advertising empire.

In a 32-page proposal, lawyers for the Justice Department outlined a framework of options for how the court should dismantle Google’s monopoly power in search. The potential remedies spanned from the harshest — breaking the company apart — to more limited plans, such as forcing Google into a data-sharing arrangement with rival search providers. But even as the most severe remedy is on the table, investors are still waiting for more guidance before making any big moves. In that reading, what may initially seem like denial reads pragmatic.

“We think Google’s valuation at the moment largely discounts most of the associated regulatory risks but the market is looking for greater clarity on pending issues before bidding the stock in one direction over another,” said Angelo Zino, senior equity analyst at CFRA Research.

Google’s year-to-date stock performance has lagged behind most of its Magnificent Seven peers, sitting in fifth place up about 15% and trailing the broader market’s gains of about 21%. So it may be that Wall Street has already priced in the regulatory risks. What’s more, an outcome that mandates Google change its business practices, rather than divest, could push the stock higher if investors see the ruling as a merciful punishment.