How Shareholders Think Alphabet Could Turn It Around

How Shareholders Think Alphabet Could Turn It Around
Paul Allison, CFA

over 1 year ago1 min

Mentioned in story

After Big Tech’s dismal earnings season cast doubt on future revenue growth, calls have been mounting for the big spenders to discover their thrifty side.

TCI Fund Management (TCI) – one of Alphabet's biggest shareholders with around $6 billion of its stock – isn’t talking behind anyone’s back: the firm said Alphabet has “too many employees” and the “cost per employee is too high” in a letter to Alphabet’s CEO earlier this week. TCI’s own analysis shows that Alphabet’s been increasing staff by 20% a year since 2017, and paying its median employee a whistle-worthy $296,000 a year – $100,000 more than Microsoft.

That might have been worth it when sales were keeping pace, but that wasn’t the case last quarter: Alphabet’s core search business made only 6% more revenue than the same time last year, while total expenses leapt nearly 20%. That blew seven percentage points off Google services’ profit margin, and TCI thinks the remaining 32% is unacceptable. Instead, it says, the firm should target a 40% margin, and management’s compensation should be tied to that – a rare move in Big Tech.

Now, Alphabet might say that hiring cuts could backfire if sales pick up again soon, but TCI’s pretty sure the firm could operate just as well with “significantly fewer employees”. So if revenue growth stays lackluster, Alphabet’s probably going to be under pressure from shareholders the world over, and that may be no bad thing: Big Tech has never entertained any long-term cost discipline in its 20-year history, and changing that attitude could shift its profit margins too.

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