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Why Alphabet Stock Pulled Back Today

What happened

Shares of Alphabet (GOOG -1.98%) (GOOGL -2.09%) were moving lower today in response to a lawsuit from the Department of Justice and eight states, which are suing to break up what they see as Alphabet’s online advertising monopoly.

As a result, the stock finished the day down 2%.

So what

The Justice Department’s lawsuit alleges that Google abuses its power in advertising auctions as a dominant broker and supplier in the digital advertising supply chain, harming both ad tech companies and publishers.

The suit calls for Google to unwind its 2008 acquisition of DoubleClick, an ad-serving company, and to sell its ad exchange. 

The filing said, “Google uses its dominion over digital advertising technology to funnel more transactions to its own ad tech products where it extracts inflated fees to line its own pockets at the expense of the advertisers and publishers it purportedly serves.”

This is far from the first time Alphabet has been sued over antitrust matters. The company also faces an investigation in Europe. And the Justice Department sued it in 2020 over its payment to be the default search engine on Apple’s Safari browser, among related issues, in a case due to go to trial this year.

Now what

The lawsuit is the latest headache for the company, coming just days after it said it would lay off 12,000 employees after profits declined and the stock price tumbled last year. Activist investor TCI called on the company to cut even more costs after the announcement.

Regulatory concerns have long been a thorn in Alphabet’s side, but so far nothing has significantly damaged the company. Still, the lawsuit is more aggressive than observers had expected, and the Justice Department earlier rejected Alphabet’s offer to spin off the ad tech business into a separate subsidiary.

It will take time for the suit to play out in court, and while it might not have a material impact on the business, investors shouldn’t ignore the regulatory risk with Alphabet stock.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Apple. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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