On Jan. 12, Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) made its first big layoff announcement of the year. However, this layoff news did not elicit much of a reaction amongst traders in GOOG stock. Shares barely budged following the announcement.
However, this is not surprising, given the limited nature of this layoff round. Cutting just a few hundred positions, at two of its “Other Bets” ventures, the company has yet to announce an across-the-board downsizing. That is, one similar to the layoffs announced by peers like Amazon (NASDAQ:AMZN) and Meta Platforms (NASDAQ:META).
To renew investor enthusiasm, the Google and YouTube parent will likely need to to follow suit, and pursue other cost-reduction efforts.
Even then, though, layoffs alone may not solve all of what ails this hard-hit FAANG component. There’s another big concern that if left unaddressed, could continue to negatively affect the stock’s long-term prospects.
GOOG Stock and the Latest Job Cutting News
As reported by the Wall Street Journal, the layoff plans Alphabet announced last week consisted of a 200-employee reduction at Verily, the umbrella entity holding Alphabet’s healthcare-related “Other Bets,” along with a 40-employee reduction at Intrinsic, one of the company’s robotics-related “Other Bets.”
As mentioned above, this news hasn’t had a big impact on GOOG stock. In light of Amazon’s recently-announced 18,000 layoffs, and Meta’s more than 11,000 layoffs, Alphabet’s latest job-cutting announcement will likely have little impact on future earnings results.
Current economic challenges are likely to keep weighing on results throughout the year. The situation may improve by 2024, but unless growth re-accelerates to pandemic-era levels (which does not appear likely), an earnings rebound next year may not be enough to push shares back to past highs, and onto new highs.
That said, don’t assume, either, that if Alphabet were to all of a sudden announce a sweeping cost reduction plan, one in line with the recommendations activist investor TCI Fund Management provided to CEO Sundar Pichai last fall, a recovery will fully take shape.
Another Factor Could Counter Cost Reduction Gains
It’s not set in stone that the aforementioned layoff news will be the only restructuring news with GOOG stock in the near term. Alphabet could make further cuts at more of its “Other Bets” ventures. A five-figure layoff announcement may still be forthcoming for its main business.
However, even if Alphabet started to implement large-scale cost reductions, it may have a limited effect on GOOG’s long-term performance. Any resulting gains in profitability from reducing its employee count, or from trimming employee perks, could be outweighed by the impact of another factor: rising competitive risks.
Competition from Amazon and Microsoft (NASDAQ:MSFT) may limit the potential for Google’s cloud computing segment to become a material contributor to its bottom line. The further rise of TikTok could continue to come at YouTube’s expense. Already affecting YouTube’s growth, in time it could put pressure on the platform’s margins.
Most concerning, however, are the potential long-term threats to Alphabet’s Google Search segment, its core business unit.
As I recently discussed, Microsoft’s growing relationship with OpenAI (the developer of ChatGPT) has the potential to drain Google’s deep moat. In other words, put pressure on its industry-leading margins, pushing profitability lower.
Bottom Line
Put simply, two events need to happen, before the “story” truly changes for Alphabet. The aforementioned layoffs at a few of its “Other Bets” segments are a step in the right direction, but management needs to follow the lead of its rivals, and begin to optimize its operating costs.
Alongside this, Alphabet’s C-suite needs to put a concrete plan in motion to maintain its Search advertising dominance, as well as contend with the competitive challenges its cloud and video segments are experiencing.
Until this happens, shares are likely to continue underperforming, trading sideways in the short term, making only a slight partial recovery when the overall stock market begins to bounce back. With this in mind, there’s still little reason to dive back into GOOG stock today.
GOOG stock earns a D rating in Portfolio Grader.
— Louis Navellier and the Investor Place Research Staff
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Source: Investor Place