Here’s What Google Layoffs Would Mean for GOOG Stock

Stock Market

Will Google and YouTube parent company Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) join the Big Tech layoff club? It’s a valid question, but GOOG stock investors shouldn’t worry too much. If there is a large-scale workforce reduction at Google, it’s a sign that the company is being proactive in navigating a challenging economy.

Don’t misunderstand — layoffs aren’t enjoyable. They should be viewed as an unpleasant but sometimes necessary cost-cutting measure. There’s no denying that the threat of headcount reductions can have a negative impact on a company’s morale.

On the other hand, today’s technology business can’t afford to just bleed money without taking action. In the long run, a leaner Alphabet could be more competitive and offer greater value to the company’s shareholders.

What’s Happening With GOOG Stock?

Speaking of shareholder value, it’s worth noting that Alphabet has a trailing-12-month price-to-earnings (P/E) ratio of 19.1x. That’s quite reasonable, and GOOG stock anywhere near $100 looks like a pretty good bargain.

Value proposition aside, prospective investors should be aware that not everyone’s pleased with Alphabet’s performance. Indeed, one activist investor insists that Alphabet needs to implement some major changes.

“The company has too many employees and cost per employee is too high,” is the complaint of TCI Fund Management. Moreover, the activist investor declared, “Cost discipline is now required as revenue growth is slowing” at Alphabet, and “cost growth above revenue growth is a sign of poor financial discipline.”

That’s harsh criticism, but it’s not unjustified. TCI Fund Management pointed out that Alphabet pays some of the highest salaries in Silicon Valley. The activist investor also called Alphabet’s workforce growth “excessive.” To justify this critique, TCI observed that Alphabet has increased its headcount 20% per year since 2017, and has more than doubled its workforce since that year.

Google Will Probably Enact Major Job Cuts Soon

Will Alphabet heed TCI’s advice and implement financial discipline? The answer is probably yes, as Google is already considering laying off 10,000 employees, which would equate to 6% of the company’s workforce.

Reportedly, Google would utilize a ranking system to eliminate the “poor performing” employees, meaning the ones who ranked lowest. This could be a sensible move for the company to make, as the remaining workers should be the ones who contribute the most in terms of efficiency and productivity.

Again, I’m certainly not claiming that this would be a pleasant process. A CNBC report emphasizes the sense of anxiety among Google’s employees, and that’s understandable.

Yet, Google probably over-hired during the past few years, and now its workforce looks bloated. The time to rectify this situation is sooner rather than later. Otherwise, TCI’s allegation of “poor financial discipline” will be spot-on.

What You Can Do Now

Of course, Alphabet and Google aren’t required to take TCI Fund Management’s advice. However, it makes sense for Google to slim down its operations and eliminate some workers if they’re not performing up to par.

After all, the economy is suboptimal and Google must respond now or suffer the consequences later. So, even while layoffs shouldn’t be celebrated, they may be necessary and could make Alphabet a more productive business. Therefore, it’s sensible to hold GOOG stock as it’s trading at a reasonable valuation. Potential layoffs aren’t a reason to sell.

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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