Google’s breakup is starting to get priced in

The trial for the Justice Department’s second antitrust case against the internet titan started Monday. That comes a month after Google lost the first case, with a federal judge ruling that the company engaged in illegal practices to maintain its dominance in internet search. The current trial challenges Google’s position in the ad-tech industry, where the company’s tools play a major role in the buying and selling of online advertising.

The first case could result in an order to separate the search business from the company’s Android and Chrome platforms. In the second case, the government is seeking an order that would force Google to divest itself of its ad-tech services.

Threats of government crackdowns have swirled around Google and its big tech peers for years now. That has done little to dent their business momentum or appeal to investors; the combined market capitalizations of Apple, Microsoft, Amazon, Google-parent Alphabet and Facebook-parent Meta Platforms totaled a little over $12 trillion by the end of June—up 146% from the beginning of 2020. That is more than double the S&P 500’s performance in that time.

But Google’s parent has recently broken from that pack. Alphabet’s stock is down nearly 14% since the start of the current quarter—a notable drop even against other major tech stocks that have slipped in that time due to market rotation dynamics and growing worries about artificial intelligence investments.

Microsoft and Amazon, Google’s closest peers in AI and cloud computing, have seen their share prices slip nearly 4% each this quarter. And at around 19 times forward earnings, Alphabet is also the only megacap tech stock trading at a discount to the S&P 500 on that measure, according to FactSet data. Apple, Microsoft, Amazon, Meta and AI chip titan Nvidia average 31 times projected earnings.

Wall Street is still relatively positive on Google; 78% of analysts rate Alphabet’s stock as a buy, according to FactSet. But among analysts, there has been a notable shift in tone lately about the company’s regulatory challenges.

“At the margin, we are more cautious on Google’s shares," wrote Mark Mahaney of Evercore ISI in a report Monday, projecting “significant uncertainty" for the next 12 months. Mark Shmulik of Bernstein wrote earlier this month that “it’s hard to envision Google escaping the battles unscathed."

The stakes in the two cases aren’t exactly equal. The ad-tech lawsuit targets a business that produced about $20 billion in revenue in 2020, according to filings in the case—about 11% of Alphabet’s total revenue that year. But nearly three-quarters of that was shared with Google’s partners in the form of traffic acquisition costs, making it a far less profitable business than the company’s core search offering.

Justin Patterson of KeyBanc Capital estimates a full divestiture of ad-tech would knock only 1% to 2% off Alphabet’s project per-share earnings in 2025. Still, Patterson says Google wields “disproportionate market share" in this business. “We believe this is a difficult trial for Google to win," he wrote in a Sept. 9 report.

The search case is potentially more damaging. Google has long paid Apple billions of dollars a year to be the default search option on Apple’s mobile devices. The ruling last month found that deal and other similar ones have limited competition in the search marketplace, where Google has long maintained a global share of more than 90%, according to Statcounter. Among the penalties the government reportedly is seeking is forcing Google to divest itself of its Android mobile operating system and Chrome browser.

Most analysts doubt that outcome, given that neither really work as stand-alone businesses. But other penalties are possible, such as banning Google from paying companies like Apple for preferred search placement, which could open the door for competitors like Microsoft’s Bing engine to secure those slots. “We believe the status quo is no longer possible, and we expect the judge to decide on a remedy that will be punitive for Google," wrote Doug Anmuth of JP Morgan in a Sept. 3 report.

But any outcome in the search lawsuit won’t be clear for some time, as the judge presiding over that case doesn’t plan to issue a ruling on the remedies until next August. And Google will almost certainly appeal any adverse ruling, which could tie up the matter for at least another year beyond. That gives the company plenty of time to strengthen its businesses and plan for multiple outcomes, but that could also mean a long overhang for the stock. The only certainty for Google at this point is that nothing is going to be certain for a long while.

Write to Dan Gallagher at dan.gallagher@wsj.com