After a decade of blockbuster returns, the tech industry is having a rough year. The Nasdaq Composite is down about 31% year to date, falling twice as far as the S&P 500, and there's been a steady drumbeat of layoffs from the tech sector in recent months. Among the tech companies announcing layoffs are Stripe, Twitter, Snap, Netflix, Shopify, Meta Platforms (META 2.20%), and Amazon (AMZN 1.84%).
Of the bunch, the layoffs at Meta and Amazon, with each company letting go of around 10,000 people, best exemplify the changing winds in the tech sector. Both companies dominate their respective industries -- social media at Meta and e-commerce and cloud computing at Amazon -- and had never done layoffs of this size before.
After years of growth, tech companies appear to have gotten ahead of themselves and are preparing for leaner times as customers cut back on spending.
Much like Amazon and Meta, Alphabet (GOOG 2.52%) (GOOGL 2.53%) has also seen its revenue growth rate decelerate sharply, coming in at just 6% in the third quarter. The parent company of Google hasn't announced layoffs yet, but is it time for the company to cut back on its staff? Let's investigate.
Time for Alphabet to cut back?
Alphabet CEO Sundar Pichai has lamented his company's declining productivity on more than one occasion. In August, he reportedly told employees, "There are real concerns that our productivity as a whole is not where it needs to be for the headcount we have." And he's urged the company to become more "entrepreneurial."
It's easy to see why Pichai might feel this way. Alphabet now has nearly 200,000 employees, and the company's core business drivers have changed little in recent years. In fact, over the last year, Alphabet's headcount grew by 24% to 186,779, even as revenue is up just 6% year over year. Management told investors on the recent earnings call that it would tamp down hiring into 2023, with new hires in the fourth quarter expected to be less than half of what they were in the third quarter.
Based on its last four quarters, Alphabet brings in a hefty $1.51 million in revenue per employee, thanks to the power of its advertising business, which can scale with relatively little need for additional labor. Thanks to last year's growth surge, Alphabet's revenue per employee is actually higher than it's been historically. Still, given the surge in headcount, it's not surprising that investors are questioning whether all that staffing is necessary, especially with the stock price down a third this year.
An obvious target
Just as Meta and Amazon are targeting money-losing businesses with their layoffs, it may be time for Alphabet to take the knife to its Other Bets, the business segment that includes "moonshots," like self-driving tech company Waymo and life-sciences projects focused on anti-aging and curing cancer. They are bold bets, but the segment has been around for close to a decade and its losses continue to balloon. In its most recent quarter, other bets lost $1.6 billion on just $209 million in revenue.
Management also rarely mentions these businesses on earnings calls, adding to the perception that they're unlikely to be monetized anytime soon.
If Alphabet were to do layoffs, other bets seem like an obvious target. The segment can only lose so much money without escaping scrutiny.
Layoffs could be on the way for Alphabet
Last week, activist investor TCI called on the tech giant to slash costs, saying that Alphabet would be more efficient with fewer employees. Managing Director Christopher Hohm said in a letter to Pichai, "A highly bloated cost base doesn't serve the ability of a company to reinvest and for the stock price to appreciate."
Also last week, The Information reported that Google managers have been asked to classify 6% of the company, or about 10,000 people, as low performers, perhaps paving the way for layoffs. The website also reported that the company is adjusting Google Cloud sales commissions by making them tied to what customers spend. This is one way to rein in worker pay.
Whether or not layoffs come to Alphabet, it's clear that a substantial portion of its investor base would like it to scale back spending. There's a significant opportunity to do so now.
Scaling back on hiring is a step in the right direction, but Alphabet has the potential to increase profits through layoffs or cutting spending in other ways, like focusing on Other Bets. For a stock that already looks cheap, that's one reason to give it a closer look as its cutbacks would only make the valuation more appealing.