Gloomy morale and bleak macroeconomic forecasts are raining down on big tech. There may be a silver lining for investors.
Alphabet (GOOGL) may cut as many as 10,000 jobs, according to a report Friday from The Information. Sources say the firm is about to cull as many as 6% of low performing coders.
Their replacement is the opportunity for investors. Let me explain.
Alphabet has been a voracious consumer of engineering talent. The workforce grew to an astonishing 186,779 full-time employees at the end of September, up 24.5% increase year-over-year. And even the wages shot to record highs and competition became fiercer, executives at the Mountain View, Calif.-based search giant continued to invest in human capital.
Ironically, the foundation of Alphabet is machine learning.
Since their student days at Stanford, founders Larry Page and Sergey Brin understood the powerful business leverage of computer models that could learn through data analysis. As this form of artificial analysis evolved, Google
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Unfortunately, Alphabet currently has a short term revenue problem. Its businesses have become so large, they can no longer grow in the vacuum of digital transformation. They are impacted by the deteriorating global economy, weaker corporate sales forecasts, and slowing advertising budgets.
On the other hand, there is a big opportunity to remake Alphabet using the same tools that are the bedrock of the firm’s best in class digital services.
Pitchfork is an internal Google program that uses machine learning software to train code to write code, then repair and update that code automatically. The need for human software writers is dramatically reduced, according to a report at Business Insider.
The timing of Pitchfork is convenient for shareholders.
Google Reviews and Development launched in May, with a mandate to evaluate the performance of employees. GRAD previously culled the bottom 2% of workers. The Information notes the new performance review process will move that target to 6%. The math for workers is daunting. A cut of that size would means 11,000 pink slips.
If the layoffs at Alphabet do materialize they would follow a gloomy trend in big tech. During the past three months alone, firings have been announced at Meta Platforms
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The silver lining for shareholders is job cuts at Alphabet, and the successful rollout of Pitchfork, would completely change the investment narrative. Glassdoor reports that software engineers at Alphabet make an average of $120,863. And headcount in the third quarter financial report comprised the majority of operating expenses. If executives can change the longer-term trajectory of the cost of revenue, Alphabet shares are significantly underpriced. That’s a really big deal.
At a price of $94.46, shares trade at only 18.7x forward earnings and4.5x sales. The stock is historically inexpensive.
I’m not recommending purchase of Alphabet at this time. Let’s put it high on our watch list and monitor the news cycle for announcements about layoffs, and Pitchfork. A big pullback on recession fears through the end of November and December would make us buyers.
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