ALPHABET SHEDS WORKERS BUT GAINS RESPECT
Gloomy morale and bleak macroeconomic forecasts are raining down on
big tech. There may be a silver lining for investors.
Alphabet (GOOGL) may cut as many as 10,000 jobs, according to a report
Friday from The Information. Sources say the firm is about to cull as
many as 6% of low performing coders.
Their replacement is the opportunity for investors. Let me explain.
Alphabet has been a voracious consumer of engineering talent. The
workforce grew to an astonishing 186,779 full-time employees at the
end of September, up 24.5% increase year-over-year. And even the wages
shot to record highs and competition became fiercer, executives at the
Mountain View, Calif.-based search giant continued to invest in human
capital.
Ironically, the foundation of Alphabet is machine learning.
Since their student days at Stanford, founders Larry Page and Sergey
Brin understood the powerful business leverage of computer models that
could learn through data analysis. As this form of artificial analysis
evolved, Google built the world’s largest information index, digital
advertising business, and global mapping system. None of these
herculean accomplishments would have been possible without a vast
network of computers, and ML software continuously through mountains
of data.
Unfortunately, Alphabet currently has a short term revenue problem.
Its businesses have become so large, they can no longer grow in the
vacuum of digital transformation. They are impacted by the
deteriorating global economy, weaker corporate sales forecasts, and
slowing advertising budgets.
On the other hand, there is a big opportunity to remake Alphabet using
the same tools that are the bedrock of the firm’s best in class
digital services.
Pitchfork is an internal Google program that uses machine learning
software to train code to write code, then repair and update that code
automatically. The need for human software writers is dramatically
reduced, according to a report at Business Insider.
The timing of Pitchfork is convenient for shareholders.
Google Reviews and Development launched in May, with a mandate to
evaluate the performance of employees. GRAD previously culled the
bottom 2% of workers. The Information notes the new performance review
process will move that target to 6%. The math for workers is daunting.
A cut of that size would means 11,000 pink slips.
If the layoffs at Alphabet do materialize they would follow a gloomy
trend in big tech. During the past three months alone, firings have
been announced at Meta Platforms (META), Amazon.com (AMZN), Microsoft
(MSFT), Salesforce.com (CRM), and Oracle (ORCL).
The silver lining for shareholders is job cuts at Alphabet, and the
successful rollout of Pitchfork, would completely change the
investment narrative. Glassdoor reports that software engineers at
Alphabet make an average of $120,863. And headcount in the third
quarter financial report comprised the majority of operating expenses.
If executives can change the longer-term trajectory of the cost of
revenue, Alphabet shares are significantly underpriced. That’s a
really big deal.
At a price of $94.46, shares trade at only 18.7x forward earnings and
4.5x sales. The stock is historically inexpensive.
I’m not recommending purchase of Alphabet at this time. Let’s put it
high on our watch list and monitor the news cycle for announcements
about layoffs, and Pitchfork. A big pullback on recession fears
through the end of November and December would make us buyers.
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