Why Alphabet's Investors Should Root for Its Breakup

The recent U.S. District Court ruling that Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) operates as an illegal monopoly in two key segments of the digital advertising market has tremendous implications for the tech company. Since ads are its primary source of revenue, a breakup of the business might seem to bode poorly for the Google parent.

Nonetheless, advertising is just one of many businesses under Alphabet's umbrella. If the company broke up, that would put many of its businesses under separate management teams, which could lead to the creation of more shareholder value. Here's why.

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Immediate implications

Alphabet has already indicated that it will appeal the ruling. Thus, a breakup is unlikely in the near future. Also, Alphabet has previously shown that it can be willing to part with businesses. For example, it sold enterprises such as quantum computing company SandboxAQ and supply chain optimization start-up Chorus after concluding they were poor fits for its business model.

Yet a breakup of the company, particularly one focused on hiving off its digital advertising exchanges or publisher ad servers, might appear to hurt the tech giant at first. Despite management's efforts to grow other sources of revenue, digital advertising still made up 74% of the company's top line in the first quarter of 2025.

Also, both digital advertising and the company's primary non-ad revenue source, Google Cloud, are tremendously profitable. They are the primary reason that the company holds $95 billion in liquidity and was able to generate $75 billion in free cash flow over its last four reported quarters.

Moreover, investors should also not dismiss the innovative environment Alphabet has built. Many products and applications it developed internally have helped to boost its top line over time.

What a breakup could bring

However, investors should remember that Alphabet is a collection of businesses. Some, like Google Search and YouTube, are part of its lucrative digital ad empire. Google Cloud, with no direct connection to the ad business, accounted for 14% of the company's overall revenue in Q1.

It's also important to recognize that smaller companies can grow at faster relative rates than large enterprises. That could mean that YouTube or the ad infrastructure enterprise Google Network might grow at faster percentage rates as separate enterprises than megacap Alphabet can.

Even worse, Alphabet does not publish the specific financial results of many of its businesses separately -- units like Verily Life Sciences, AI researcher DeepMind, investment arm CapitalG, and the autonomous driving company, Waymo all get rolled up under umbrella categories. Because of this, investors can't know if or how much these companies contribute to its bottom line.

The decision not to provide data on Waymo is perplexing since external estimates value the unit at approximately $45 billion. If that's an accurate view, Waymo as an independent entity would be a large-cap company. Knowing that, one might wonder how investors would fare if they could buy Waymo as a separate stock, whether by choice or by legal decree.

Additionally, the history of broken-up companies indicates that a separation could benefit shareholders long term. The breakup of Standard Oil in 1911 led to the creation of Exxon, Chevron, and numerous other energy giants that exist in some forms today. In the tech world, the breakup of the original AT&T in 1984 sparked a boom in the communications industry.

In both cases, the sums of the parts grew far larger than the size of the original whole. That suggests that a breakup could unlock massive amounts of shareholder value within Alphabet.

Rooting for a breakup

Ultimately, it's far from a sure thing that the courts and regulators will compel a breakup of Alphabet, but on balance, if they did, it would appear that such an outcome could benefit its shareholders.

Admittedly, the lost ad revenue could bode poorly for the Google parent at first, and the smaller tech company that resulted might not maintain as much of an edge as an innovator.

However, investors are understandably frustrated by the inability to invest directly in businesses such as Waymo or CapitalG. Moreover, the history of breakups shows that such actions have boosted shareholder value over the long term. Even a forced move can be helpful sometimes.

Hence, instead of pushing for further growth under the Alphabet umbrella, the company would likely serve investors better by breaking up the company and giving shareholders stakes in the new enterprises formed by such an action.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Chevron. The Motley Fool has a disclosure policy.