On Jan. 20, tech giant Alphabet (GOOG 0.87%)(GOOGL 0.75%), Google's parent company, made headlines because it laid off 12,000 of its employees, which was roughly 6% of its workforce.
Many investors were aware of the news and are discussing the implications. However, there's one tiny detail in the news that I believe is worth deeper discussion as it relates to Alphabet's layoffs. That detail is the recent surge of the artificial intelligence (AI) trend.
NASDAQ: GOOG
Key Data Points
Is Alphabet afraid of competition from AI?
Many investors focused on the size of Alphabet's layoffs. Others focused on CEO Sundar Pichai when he said, "I take full responsibility for the decisions that led us here." But for me, what stood out was Pichai's comments about AI. In his blog post discussing the layoffs, AI was mentioned three times -- odd, considering those mentions didn't directly relate to the layoffs.
Pichai twice commented about how Alphabet's products have AI capabilities, which gives the company future opportunities. The other comment was about how Alphabet invested in AI early in its journey, something mentioned in one of the first two comments as well. Pichai's message was clear: Alphabet was early to the AI trend and expects to profit from it in the future.
But why bring this up in a blog post to discuss parting ways with 12,000 workers?
At a recent town hall event for those still employed by Alphabet, Pichai perhaps shed some light on this. According to CNBC, Pichai pleaded with workers to stay motivated because Alphabet's competition from AI is getting stronger. That implies Alphabet laid off workers to focus hard on execution because the competition is coming.
Alphabet makes it case to investors
Alphabet seems to be talking about its capabilities in AI now more than ever. In addition to Pichai's comments in his blog post, the company has released four news articles in recent weeks to talk about AI. Here are the headlines:
- "Google Cloud Unveils New AI Tools for Retailers"
- "Why We Focus on AI (and to What End)"
- "7 Ways Google Is Using AI to Help Solve Society's Challenges"
- "9 Ways We Use AI in Our Products"
Now, to be fair, Alphabet has invested in and talked about AI frequently for years. However, the market and the public are currently focused on advances in AI that don't have anything to do with Alphabet. And one can't help but feel like Alphabet is desperately trying to insert itself back into the conversation.
The AI headlines are dominated right now by OpenAI's text generation application ChatGPT. And those headlines often mention Microsoft because of its reported $10 billion investment in OpenAI.
Some go so far as to speculate that ChatGPT could represent the next iteration of internet search. With Google search, users are given a list of websites that provide the information they're looking for. But ChatGPT can process the internet information and generate a summarized text.
In December, CNBC reported that one Alphabet employee asked executives whether ChatGPT's rise to prominence was a "missed opportunity" for Alphabet. Pichai reportedly responded that Alphabet is reluctant to move too fast in an application like ChatGPT for fear of messing up and damaging its reputation.
Perhaps that was a valid concern. But by letting ChatGPT steal the show, Alphabet lost its reputation for being a leader in this space. And its recent AI emphasis makes it look like it's trying to get its reputation back.
What to do with all this speculation?
For those bearish on Alphabet because of ChatGPT and other advancements in AI, I don't think Alphabet is in as dire of a situation as you might think. It has over $100 billion in net cash on the balance sheet and has earned over $55 billion in year-to-date net income.
In short, Alphabet is a company that won't go down easily. And I'd be very slow to make an investment decision with this stock based on the rise of ChatGPT.
That said, for those bullish on Alphabet, I believe the problem might be bigger than the bulls realize. I'm basing this opinion on Pichai's own town hall comments about the growing competitiveness of AI -- it does indeed appear to be an issue front and center on management's mind.
Furthermore, consider that for all the money Alphabet has spent over the years to diversify its business, almost 82% of revenue still came from ads during the third quarter of 2022. Part of this speaks to its wild success with ads. But it also speaks to a lack of meaningful development elsewhere.
For 2023, I believe investors should watch how Alphabet starts flexing its muscles when it comes to AI. It does seem like that's what the company will focus on. And it may need to be successful there more than many investors realize.
