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Alphabet Inc.: Is This the Sign That Google Inc. Has Peaked? (GOOGL)

Google forgot one of the most important rules of business: If it's not broken, don't fix it (even superficially)

So … let me get this straight.

The Creation of Alphabet Inc. Offers No Real Upside to GOOGL OwnersWe currently have a company we know and love as Google Inc. (GOOGL) that is overseen by CEO Larry Page, and that owns the search engine also known as Google that’s ultimately run by Vice President Sundar Pichai.

But that’s going to become a company called Alphabet Inc. — to be managed by Larry Page as CEO — which will hold a slimmer, Sundar Pichai-led Google as its biggest subsidiary?

Yep, that’s the essence of what Google Inc. CEO and soon-to-be Alphabet Inc. CEO Larry Page explained after the close on Monday.

And yep, it’s as pointless as it sounds, unless the goal was to give Sundar Pichai a bigger title without actually posing a threat to Larry Page’s position.

Normally such matters would be of little concern to … well, anyone. Most investors recognize this is all tantamount to making change, turning two $10 bills into four $5 bills.

When you’re talking about Google Inc., though, to see these “restructurings” that serve little to no discernible purpose raises something of a red flag.

Meet Alphabet Inc.

The news came out in the form of a letter to shareholders, the text of which made a lot of superficial sense. Rather than everything else the company is working on, like drones and life sciences, remaining under the same umbrella as its primary web product (and potentially serve as a distraction to Pichai), those smaller projects and proverbial moonshots will be part of Alphabet Inc.

From a focus perspective, kudos to the company. Being a jack of all trades means you’re a master of none. To really compete in a Google-esque way, each project is going to need unfettered attention.

And there’s no denying Sundar Pichai deserves the accolade, even if it’s largely a cosmetic one with more bark than bite. He’s been good for Google, and perhaps more than that, he’s seamlessly eased into a CEO-like role, melding humility, articulation, wisdom and confidence into a persona investors feel like they know and can trust.

Even so, the maneuver has to leave investors wondering what the ultimate upside here is, given the potential risks involved.

The bulk of the answer quietly lies in the seventh paragraph of the letter from Larry Page.

Given the length and message of the announcement letter, it would have been easy to gloss over it in search of a proverbial grand finale. One can’t help but wonder, however, if the true goal was the last sentence of this snippet from the message (emphasis mine):

“Alphabet is about businesses prospering through strong leaders and independence. In general, our model is to have a strong CEO who runs each business, with Sergey and me in service to them as needed. We will rigorously handle capital allocation and work to make sure each business is executing well. We’ll also make sure we have a great CEO for each business, and we’ll determine their compensation. In addition, with this new structure we plan to implement segment reporting for our Q4 results, where Google financials will be provided separately than those for the rest of Alphabet businesses as a whole.”

Not that Google hasn’t been doing well, but it’s no longer vogue for a multi-faceted company to simply paint a picture using broad brush strokes. Investors want details.

Case in point? Amazon (AMZN). It wasn’t until two quarters ago the company broke out the P&L results for its oft-hyped Amazon Web Services (AWS) venture. The market immediately loved the company for it, though, so much so it was completely willing to overlook how AMZN boasts margins that can only be described as pathetic.

Microsoft (MSFT) is another technology name that has kept investors willing to be patient by providing significant transparency of its different business ventures.

Alphabet Inc. can do the same by demonstrating huge success via Google, and simultaneously convince the market to overlook the big expenses being occurred on other fronts. The company will almost certainly see the market’s enthusiasm grow.

And Yet …

With all of that being said, this is a case where the superficial restructuring may not be worth the bother, or the risk.

The point is well taken — a clear division of a company’s different arms allows for the focus needed to be hypercompetitive. But of all the companies that are struggling with this challenge, Google wasn’t and still isn’t one of them. Indeed, it’s the web-like organizational chart that make Google nimble enough to be great. The very act of fixing something that isn’t broken runs the risk of breaking it.

More than that, however, the creation of Alphabet Inc. sets up a potential butting of heads at the top of the company’s hierarchy.

It’s not difficult to see Larry Page has ceded a great deal of Google’s daily operation to Sundar Pichai. Likewise, Pichai has been worthy of taking on that responsibility. When push came to shove, though, as a vice president, Pichai always answered to CEO Larry Page, who took the ultimate responsibility for everything the company did.

But with his impending title of Chief Executive Officer of Google, and with Larry Page’s role as CEO of the company that’s about to own Google, it won’t be as clear who’s responsible — and how they’re responsible — in the future.

Maybe it won’t matter. Maybe nothing will change and the creation of Alphabet Inc. will lead to bigger and even better things.

Or maybe GOOGL doesn’t know what to do next, and in an effort to get something — anything! — done, it’s simply throwing the most benign spaghetti it can find on the wall to see if it sticks.

If that’s the case (and I fear it is), it may be a clue that Google has just peaked as an iconic company.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/08/alphabet-inc-google-inc-googl/.

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