Alphabet Too Lays Off Employees as Stockholders Get Restive

Tech layoffs have mounted over the last six months and even the Big Tech companies are not unaffected. Alphabet (NYSE: GOOG) has also laid off some employees from its new businesses.

Alphabet has reportedly laid off employees at Intrinsic, its robotics unit. The company has also laid off around 240 employees at Verily, its life science unit. While announcing the layoffs, Verily CEO Stephen Gillet said, “While these programs are promising and led by talented Veeps, and some of their innovations will integrate into our other core solutions, we cannot do everything and have had to make some difficult choices.”

Alphabet lays off employees in “Other Bets”

He added, “Some Veeps will be redeployed to other teams; others will unfortunately be leaving us. These people have helped make Verily the company it is today, and I know how hard it is to see valued friends and colleagues depart.”

Notably, Alphabet led a $1 billion investment round in Verily last year. However, market conditions deteriorated in the last quarter of the year. Alphabet, which was the best-performing FAANG stock of 2021, fell 39% in 2022.

GOOG stock fell 39% last year

It was still the second-best performing FAANG of the year though. Apple was the best-performing FAANG but still lost 28% in 2022. The other three FAANG stocks fell even more sharply and Meta Platforms was the worst performer of the lot.

Meanwhile, Intrinsic forms part of the “Other Bets” businesses of Alphabet. These businesses have been posting losses even as they look promising for the long term. Amid the sagging stock price and deteriorating market conditions, some stockholders want the company to cut its expenses, and curtail losses in the new businesses.

TCI Fund Management wrote a letter to Alphabet

In November, TCI Fund Management, which owns around $6 billion worth of Alphabet shares, wrote a letter to the company calling upon the management to lower costs, trim losses in new businesses, set an EBIT target, and increase buybacks.

In its letter, TCI said, “An analysis by S&P Global illustrates that median compensation at Alphabet was 67% higher than at Microsoft and 153% higher than the 20 largest listed technology companies in the US. There is no justification for this enormous disparity.”

It said that cost controls took a back seat between 2017 and 2021 as Alphabet’s sales were rising at a fast pace. It however said, “cost discipline is now required as revenue growth is slowing. Cost growth above revenue growth is a sign of poor financial discipline.”

It also said that “As part of basic financial management, Alphabet should establish and publicly disclose an EBIT margin target for the Google Services segment. We believe an EBIT margin target of at least 40% is reasonable.” TCI said that Alphabet management’s compensation should be linked to the EBIT target.

TCI called upon GOOG management to cut losses in other businesses

TCI also called upon Alphabet management to cut losses in new businesses. It said, “Over the last five years, Other Bets has generated only $3 billion of cumulative revenues but incurred a massive $20 billion of cumulative operating losses.”

TCI said that Alphabet should cut the losses in these other bets by half. It especially pointed to the losses at Waymo, Alphabet’s self-driving unit. Notably, the optimism over self-driving companies has come down.

Argo AI, which was backed by Ford and Volkswagen has shut down. Nuro, which is backed by Alphabet, SoftBank, and Tiger Global is also laying off 20% of its employees. Aurora Innovation, which bought Uber’s self-driving business in 2020, trades at a discount of over 80% over the SPAC IPO price.

TCI also wrote in its letter that Alphabet stock is undervalued and the company should increase its buybacks. It said, “Alphabet’s share price is down 34% year-to-date and the stock is trading on only 16x 2023 EPS. This is based on our estimates adjusted for losses in Cloud, Other Bets and net cash. The stock is very cheap. Alphabet should take advantage of the current low valuation and significantly accelerate share repurchases.”

Altimeter wrote a letter to Meta Platforms

Weeks before TCI’s letter, Altimeter Capital Chair Brad Gerstner, whose firm is a Meta Platforms stockholder, wrote a letter to Mark Zuckerburg and Meta Platforms board calling upon the company to lower its headcount and cut its capex. While the company defended the metaverse investments during the Q3 2022 earnings call, it subsequently announced that it is laying off 11,000 employees which was 13% of its workforce.

Alphabet talked about a slowdown in hiring

During Alphabet’s Q3 2022 earnings call, CEO Sundar Pichai said that the company has slowed the pace of hiring in the fourth quarter. He added, “Our actions to slow the pace of hiring will become more apparent in 2023.” Pichai also said, “We are focused on both investing responsibly for the long term and being responsive to the economic environment.”

Alphabet’s revenues increased 6% YoY to $69.09 billion in the third quarter but trailed analysts’ estimate of $70.58 billion. Its ad revenues increased only about 2.5% to $54.48 billion. However, YouTube revenues fell on a yearly basis. It was the first time in the company’s history that YouTube’s revenues fell YoY.

YouTube is facing stiff competition from TikTok. While the company has increased focus on “Shorts” it has been a drag on earnings due to lower monetization.

Notably, last year, the combined market share of Google and Facebook in US digital ad market fell below 50%, for the first time since 2014.

Analysts on GOOG stock

Meanwhile, Wall Street analysts are generally bullish on Alphabet stock. Tigress Financial Partners reiterated its buy rating on GOOG stock and likes the company because of its strong balance sheet.

In a client note, Tigress Financial Partners analyst Ivan Feinseth said, “GOOGL’s strong balance sheet and cash flow enable the ongoing funding of key growth initiatives, strategic acquisitions, and the further enhancement of shareholder returns through ongoing share repurchases.”

Most analysts see Apple and Alphabet as relatively safe bets amid the market turmoil. However, Alphabet faces several headwinds including the growing popularity of ChatGPT which has partnered with Microsoft for a ChatGPT-powered version of Bing