Owning one of the most valuable digital ecosystems in the world, Alphabet’s Google (NASDAQ:GOOGL)(NASDAQ:GOOG) essentially represents the gatekeeper of modern commerce. Nevertheless, GOOGL stock does not rank above broader economic pressures. Though I am long-term bullish, it, too, must adjust to new realities. Recently, activist investor TCI Fund Management Ltd. penned an open letter to Alphabet CEO Sundar Pichai, urgently requesting aggressive layoffs and other cost-cutting measures.
As TipRanks reporter Sheryl Sheth mentioned, TCI noted that Google’s parent company “has too many employees, and the cost per employee is too high.” For the record, CI has been a long-term investor in Alphabet since 2017, and its current stake amounts to over $6 billion.
Specifically, Sheth writes that billionaire hedge fund manager Christopher Anthony Hohn, who leads TCI, recommended that “Alphabet set ambitious EBIT (earnings before interest and tax) margin targets, minimize losses at other ventures, including self-driving unit Waymo, and increase share buybacks with the idle cash sitting on its balance sheet.”
In many cases, layoffs don’t always spark desired results. For instance, while Elon Musk initiated a series of job cuts at Twitter in a bid to clean up the social network, the platform is now seemingly in shambles. Even former President Donald Trump, who recently received an invite back to Twitter, retorted that he’d stick with his own platform, Truth Social.
Nevertheless, for GOOGL stock specifically, the proposed layoffs just might work out. Here’s why.
Layoffs aren’t Always Good, but Alphabet Might Benefit from Them
According to research from the Wharton School of the University of Pennsylvania, layoffs may not represent the long-term panacea that many enterprises think it is. Fundamentally, people undergird all corporate endeavors. Losing key players not only disrupts morale but also may jeopardize the underlying company’s success. Still, in some cases – arguably for GOOGL stock – headcount reductions just might spark upside momentum.
Fundamentally, Alphabet is like no other company. With its Google ecosystem owning over 92% of the global search engine market share, Alphabet effectively enjoys monopolistic power over the internet. Therefore, it may not be prudent to extract broader academic lessons from Google’s parent company specifically.
More importantly, Alphabet must move ahead of current economic woes, not follow others in their responses. For example, with e-commerce giant Amazon (NASDAQ:AMZN) laying off about 10,000 workers, it’s clear that the jig is up. Big tech stalwarts can no longer pretend that old paradigms will continue to thrive.
In addition, while Alphabet prides itself on its longshot division Other Bets – which encompass projects such as the autonomous driving unit Waymo – this segment simply doesn’t cut the mustard. For instance, major automakers abandoned their autonomous driving initiatives not too long ago, putting Alphabet on an island.
Frankly, GOOGL stock might incur more losses should the underlying company insist on staying the course.
The Quantitative Data Doesn’t Support Alphabet’s Stubbornness
Another factor to consider regarding cost-cutting measures and GOOGL stock centers on the quantitative data. By cutting money-losing ventures, Alphabet can focus on its core businesses – the endeavors that investors actually care about.
For instance, as amazing as the science undergirding Other Bets may be, GOOGL stock cannot thrive on the discipline alone. Instead, science must eventually translate to revenue and profits, which is where Other Bets lags. In the company’s third-quarter earnings report, this segment lost $1.6 billion, more than the $1.29 billion lost in the year-ago period.
Left unaddressed, the inauspicious elements of Other Bets can start dragging on GOOGL stock at the worst possible time. Notably, on a trailing 12-month basis, Alphabet’s free cash flow (FCF) stands at $62.54 billion. However, this figure conspicuously ranks below 2021’s FCF of slightly over $67 billion.
Eventually, if the Federal Reserve continues to drive interest rates higher – a dynamic that does not show any signs of abating – then Alphabet cannot continue to keep ignoring the signs. At some point, to arrest the worrying decline in GOOGL stock, management must listen to TCI’s recommendations.
Is Alphabet Stock a Buy, Sell, or Hold?
Turning to Wall Street, Alphabet stock has a Strong Buy consensus rating based on 28 Buys assigned in the past three months. The average Alphabet price target is $129.18, implying 33.11% upside potential.
Alphabet Will Likely Have to Cut Costs Soon
On a year-to-date basis, GOOGL stock dropped nearly 33% in equity value. Clearly, it’s not the direction its stakeholders envisioned at the start of 2022. At the same time, it’s almost certain that management understands this, particularly as other tech firms responded aggressively to current headwinds. Therefore, Alphabet will probably have little choice and start cutting costs sooner rather than later.
Disclosure.
Source
