Activist investor TCI urges Alphabet to reduce costs

Activist investor TCI urges Alphabet to reduce costs

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Activist investor TCI Fund Management LLP today released a letter calling on Google LLC parent Alphabet Inc. to reduce costs.

The letter, which is addressed to Alphabet Chief Executive Officer Sundar Pichai, focuses on three main areas. TCI is calling on the search giant to increase its EBIT margin, a metric that tracks earnings before interest and taxes as a percentage of a company’s revenue. Additionally, TCI’s letter argues that the search giant should buy back more shares as well as reduce losses in its Other Bets segment.

The Other Bets segment includes Alphabet’s Waymo LLC autonomous vehicle subsidiary. It also includes X, a division that develops emerging technologies such as laser-based networking equipment. 

The Other Bets segment generated $3 billion in revenue and a $20 billion operating loss over the last five years, according to TCI’s newly released letter. The investment firm estimates that the segment is currently generating a $6 billion annual operating loss. TCI argued in its letter that Alphabet should reduce that loss by at least 50%.

TCI is also calling on the company to improve its EBIT margin. The investment firm argues that Alphabet should set a higher EBIT margin target for its Google Services revenue segment, which includes the company’s flagship search engine.

“Almost two-thirds of revenues come from Search, a very strong business with high underlying margins,” TCI stated in the letter. “The Google Services EBIT margin was 39% in 2021 and therefore 40% should be easily achievable through operating leverage and cost cutting.”

The third major focus area of the letter is Alphabet’s share repurchase program. Alphabet is currently buying back shares at a rate of $60 billion per year and has $116 billion in cash on its balance sheet, according to TCI’s estimates. The investment firm argues that the search giant should use the capital to increase share purchases. 

“Alphabet should follow Apple’s capital allocation strategy and become ‘cash neutral’ over time through increased share repurchases,” TCI stated. Apple Inc. has in recent years significantly reduced the net cash on its balance sheet by accelerating stock buybacks.

Alphabet is the latest major tech firm to have come under scrutiny from an activist investor. Last month, activist investor Starboard Value LP disclosed that it had bought a stake in Salesforce Inc. and stated the cloud giant has a “subpar mix of growth and profitability.” Starboard Value has reportedly also purchased a nearly 5% stake in Splunk Inc as part of a plan to drive business changes at the company.

Photo: Google

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