Activist investor TCI Fund Management has called on Alphabet to cut costs by lowering its headcount and reducing expenses in several areas.
“We are writing to express our view that the cost base of Alphabet is too high and that management needs to take aggressive action”, the organization wrote in a letter addressed to Alphabet CEO Sundar Pichai.
“The company has too many employees and the cost per employee is too high. Management should publicly disclose an EBIT margin target, substantially reduce losses in Other Bets and increase share buybacks.”
First, when it comes to headcount, TCI quotes industry experts who say that, compared to Alphabet, “companies ranging from Google to Meta to Twitter to Uber could achieve similar levels of revenue with far fewer people”.
Salaries are also too high, the investor said. TCI observes that median compensation at Alphabet is 67 percent higher than at Microsoft and 153 percent higher than the 20 largest listed technology companies in the US. “There is no justification for this enormous disparity”, they argue.
The letter also calls on the tech giant to increase its EBIT margin, a metric that tracks earnings before interest and taxes as a percentage of a company’s revenue. “We believe an EBIT margin target of at least 40 percent is reasonable”, TCI said, sternly adding that “management compensation should be linked to this target to ensure accountability”.
Furthermore, the investor went after the company’s Other Bets segment, specifically the Waymo autonomous vehicle subsidiary. Investments into Waymo were not justified and losses should be reduced “dramatically”, TCI says. The autonomous vehicle unit has generated $3 billion but recorded operating losses of $20 billion so far. TCI demanded the unit reduce operating losses by at least 50 percent.
TCI also attacked Alphabet’s stock buyback program. The company has $116 billion in cash, which should be used to increase share purchases, they argue. Alphabet would do well to become ‘cash neutral’ over time through increased share repurchases, the investors said.
Activist investors are becoming more active in Silicon Valley. Last month, Starboard Value disclosed that it had bought a stake in Salesforce and stated the cloud giant has a “subpar mix of growth and profitability”.