What happened
Shares of tech giant Alphabet (GOOG 0.37%) (GOOGL 0.35%) rose by about 2.7% on Friday.
The increase likely happened for two reasons. First, the Bureau of Economic Analysis released its latest report on the personal consumption expenditures price index, or PCE, which came in cooler than expected in February.
In addition, Alphabet Chief Financial Officer Ruth Porat sent a memo to employees outlining further steps the company was taking to reduce costs.
So what
As the Fed has raised benchmark interest rates over the past year and slowing growth is anticipated across the U.S. economy, investors have become highly receptive to any announcements from top tech companies about plans to reduce expenses. The FAANG companies have generally been accused of over-hiring and over-spending during the pandemic. In that light, the recent announcements from tech firms that they were trimming their spending have understandably soothed investors' nerves.
Alphabet, however, had been seen as one of the more complacent companies in tech, and the most reluctant to cut costs. Still, management has finally pivoted in the past few months. It announced it was laying off 12,000 people in late January.
On Friday, Porat followed that move up with a memo to employees outlining further cost cuts. "Just as we did in 2008, we'll be looking at data to identify other areas of spending that aren't as effective as they should be, or that don't scale at our size," she wrote.
The new measures include closing some snack bars, referred to by the company as "microkitchens," along with closing some cafeterias on days with low employee traffic. In addition, Alphabet will be introducing an internal software tool that will help employees find low-cost providers of outside hardware and software.
These may seem like modest measures, but they're practical, and they could add up to significant savings. Given that many employees are working from home these days, it probably doesn't make sense for Alphabet to have as many campus cafeterias open. And seeking out lower-cost third-party providers seems like something a company should always be doing, so that measure seems long overdue.
In addition, Friday's February PCE report showed decelerations in both monthly and year-over-year inflation, which seemed to give a boost to stocks across the entire tech sector. Decelerating inflation generally means lower long-term interest rates, which boosts the present value of companies' future earnings and thus helps growth stocks like Alphabet.
Now what
Alphabet sold off during the past year along with the rest of the technology sector. But it has only bounced back modestly from its October lows, as investors are concerned about the potential effects generative AI competition could have on its internet search revenues. Still, Alphabet seems to be making all the right moves in 2023, making targeted cost cuts in non-core areas even as it ramps up its investments in Bard, its ChatGPT competitor.
We'll have to see how Bard fares against ChatGPT. Moreover, we'll get our first glimpse of search revenues in the age of ChatGPT later this month, when Alphabet reports results for Q1 -- the first full quarter since the unveiling of the generative AI chatbot back in late November. Investors will no doubt be tuning in and listening closely to what Porat and CEO Sundar Pichai have to say on these matters.
If Alphabet can navigate these rocky waters, the stock looks fairly cheap, trading at just 23 times earnings.
