Long one of the untouchables in the elite technology space, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) this year printed uncharacteristically poor performances in the charts. Since the January opener, GOOG stock (which represents the Class C shares) dropped over 31% of its equity value. In response to the losses, activist investor TCI Fund Management recently requested “aggressive action” to reduce expenses and trim headcount.
Per Bloomberg, in an open letter addressed to Alphabet CEO Sundar Pichai, TCI managing director Chris Hohn wrote that management should set targets for profit margins, increase share buybacks and reduce losses in its portfolio of Other Bets, Alphabet’s long-shot projects.
“We are writing to express our view that the cost base of Alphabet is too high and that management needs to take aggressive action,” Hohn said. “The company has too many employees and the cost per employee is too high.”
On the surface, TCI’s request doesn’t seem like an unreasonable proposal to help reinvigorate GOOG stock. According to a CNBC report, Alphabet’s compensation profile represents the gold standard for the tech industry. The company disclosed a median compensation valued at $295,884 for 2021.
In addition, TCI specifically took aim at Alphabet’s self-driving car project Waymo. “Unfortunately, enthusiasm for self-driving cars has collapsed and competitors have exited the market.” Hohn recommended that Alphabet should consider spinning out Waymo if it can find additional outside investors, per the Wall Street Journal.
What Happens to GOOG Stock if the Cuts Materialize?
While TCI makes a compelling point about Alphabet’s presently bloated cost structures, it’s also worth considering what might happen to GOOG stock should the requests be accepted. Arguments for both sides (stay the course or swing the axe) exist, making for a rousing debate.
Supporting TCI’s proposals, aggressive expenditure reductions have become the norm in big tech recently. As the WSJ pointed out, steep layoffs rippled across Silicon Valley over the last few weeks. In social media, Meta Platforms (NASDAQ:META) and now-privately held Twitter each cut thousands of jobs. Earlier this week, reports indicated that Amazon (NASDAQ:AMZN) plans to lay off as many as 10,000 employees.
With seemingly every other tech firm coming to grips with current harsh realities, Alphabet likely can’t afford to be the outlier. Over the trailing five sessions, GOOG stock gained nearly 8%, perhaps on speculation that Alphabet will start slicing and dicing.
On the other hand, it’s also important to note that cost cuts themselves don’t represent a panacea. In fact, a study by the Wharton School of the University of Pennsylvania revealed that over the long run, layoffs may spark longer-term consequences. Per studies conducted over decades, job cuts represent a “poor way to boost profits.”
Possibly recognizing this dynamic, TCI stated in its letter that while Alphabet “employs some of the most talented and brightest computer scientists,” this tally is “only a fraction of the employee base.” Based on broader tech trends, TCI might get its wish. However, the ultimate trajectory of GOOG stock remains up for debate.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
