In a fresh development, Google and YouTube parent company Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) finally settled an ongoing investigation. That’s good news, and it bodes well for GOOG stock.
Furthermore, an activist investor gave Alphabet some practical advice about how the company can cut costs. Hopefully, Alphabet’s management will consider implementing retrenchment measures soon.
Big Tech has had a tough year. While the FAANG stocks have generally underperformed, Alphabet’s investors have really had their patience tested, and some just gave up completely.
That’s a shame, as there’s a positive news development that will allow Alphabet to put a bothersome investigation in the rearview mirror. Plus, if Alphabet’s executives can make some essential changes, the company can slim down but also grow faster at the same time.
This Is Great News for GOOG Stock
GOOG stock has lost value since the beginning of 2022, but not all of the news this year has been bad. For one thing, Alphabet’s trailing 12-month price-to-earnings (P/E) ratio of 19.68x means there’s a pretty compelling bargain for investors now.
And, here’s another thing to consider: Alphabet just settled an investigation with 40 state attorneys. Those attorneys had alleged that Alphabet was illegally tracking its users’ locations.
Reportedly, Google was accused of violating state consumer protection laws. Allegedly, Google was tracking consumers’ locations after they turned off the location-history setting on their mobile phones.
Google will pay $391.5 million to settle this probe. Thus, Alphabet will finally be able to put this issue to rest. Also, Google will now have to be more transparent with its users about when location tracking is in effect. That’s actually not a bad thing, as it could help Google improve its reputation.
Alphabet Needs to Heed This Advice
Meanwhile, TCI Fund Management, an activist investor, just gave Alphabet some harsh but sage advice. “Cost discipline is now required as revenue growth is slowing. Cost growth above revenue growth is a sign of poor financial discipline,” TCI cautioned.
That might sound like an insult to Alphabet, but it’s not off base. Financial discipline is required during this time of economic stress.
TCI said that Alphabet pays some of the highest salaries in Silicon Valley, Reuters reported. Furthermore, TCI asserted that Alphabet’s growth in headcount was “excessive.” The activist investor reported that Alphabet has increased its headcount at an annual rate of 20% since 2017. Also, TCI noted that Alphabet has more than doubled its headcount since 2017.
To sum it up, “The company has too many employees and cost per employee is too high.” Moreover, “the cost base of Alphabet is too high and that management needs to take aggressive action.”
Alphabet’s management might not like the idea of reducing the company’s headcount and paying less per employee. Yet, if they’re willing to listen and implement these measures, Alphabet could grow its bottom line and its shareholders should benefit long term.
GOOG Stock Is a Buy, But With a Warning
GOOG stock isn’t a must-own because Alphabet might not implement the retrenchment measures suggested by TCI Fund Management. However, if enough pressure is placed on Alphabet, the company will probably have to take action.
At least we can say with certainty that Alphabet has settled a problematic probe. That’s a relief for Alphabet’s investors, and it means that the shares are a buy. Don’t go overboard, though; for now, all position sizes should be small.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Motley Fool, Crush the Street, Market Realist, TalkMarkets, TipRanks, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.
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