Investors wondering if Alphabet (GOOG 0.74%) (GOOGL 0.55%) would join other big tech companies in announcing mass layoffs finally got their answer.
The Google parent said Friday morning that it would let go of 12,000 employees, cutting roughly 6% of its workforce. The decision comes as the company's revenue growth slowed significantly throughout 2022 and as profits fell sharply, even as head count jumped roughly 24% to 187,000 over the past year.
In a letter to employees shared publicly, CEO Sundar Pichai acknowledged the same reality that his fellow tech chiefs had, saying: "Over the past two years we've seen periods of dramatic growth. To match and fuel that growth, we hired for a different economic reality than the one we face today." He also said the move would give the company additional resources to focus on artificial intelligence (AI).
With the growth of the business slowing significantly, it makes sense for the company to trim its workforce and shift its priorities.
Image source: Getty Images.
Keeping up with the competition
Alphabet's announcement comes after news that many of its closest competitors, Amazon, Meta Platforms, and Microsoft, are each cutting 10,000 employees or more from their payrolls.
It's unclear if Alphabet would have announced the layoffs if its peers hadn't, but those moves by its rivals essentially forced its hand. Alphabet needs to stay lean and drive profitability in order to keep up with its competition.
Alphabet has long had a reputation among some investors for being bloated and undisciplined with its spending. Its losses on other bets, which include moon shot ideas like the Waymo autonomous vehicle technology, grow each year without delivering significant revenue. In its most recent quarter, the company lost $1.6 billion on other bets and brought in just $209 million in the segment.
Similarly, while Microsoft Azure and Amazon Web Services bring in truckloads of profits for those companies, Google Cloud is still losing money, posting a shortfall of $700 million in the third quarter. Though Google Cloud is growing fast on the top line, both AWS and Azure were profitable when they were smaller than Google Cloud is today, a sign that Alphabet's cloud business is less efficient or can't compete with the larger cloud infrastructure services.
Despite its wide operating margin and ample competitive advantages, the stock currently trades at a modest discount to the S&P 500, indicating investors are taking a dim view of its future profit growth. The stock has also attracted the attention of activist investor TCI, which urged management to cut costs and head count.
Alphabet has grown to be a trillion-dollar company because of its search monopoly and prowess across digital advertising including YouTube, but now even that business is under threat from the emergence of OpenAI's ChatGPT, which has partnered with Microsoft to launch a ChatGPT-powered version of Bing, according to media reports.
A pivot to AI
Pichai's letter was also notable because he called out AI as the company's next frontier, and said the layoffs are designed to reflect the company's new priorities. He also teased new product releases, saying, "We're getting ready to share some entirely new experiences for users, developers, and businesses, too" in reference to AI.
The company's investments in artificial intelligence are well known. They include its AI subsidiary DeepMind, and LaMDA, the large language model that is similar to ChatGPT but even stronger, according to some reports.
While it may have the AI technology capabilities, Alphabet hasn't been able to monetize its AI investments in a meaningful way. It's been reluctant to deploy LaMDA to the public because it's not always accurate, and also because Alphabet doesn't want to undermine its search advertising business model, which drives roughly half of its profits.
With the new threat from Microsoft and OpenAI, revenue growth slowing, and profits falling, Alphabet will have to take real risks, and the layoffs seem to be the first indication that management understands that. Investors cheered the news, sending the stock up 5%, a sign they want to see a more disciplined Alphabet.
We could learn more about the new AI experiences the company has planned in its Feb. 2 earnings report, but the company needs to move on to the next frontier in technology. Investors are ready to reward it for making bold moves, and the stock is cheap for a company with Alphabet's potential. It's time for Pichai to unleash it.
