Why Alphabet Stock Jumped Today

What happened

A high-profile activist hedge fund is calling on Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) to aggressively cut costs and dump some of its money-losing units. Shares of the Google parent got a quick boost from the push, trading up as much as 4.6% by midday Tuesday.

So what

Alphabet is famous for its "other bets," which tend to be more speculative enterprises that are subsidized by the company's core search and advertising operations. Some amount of investment in the future is part of Alphabet's DNA, but in recent years the company has taken a closer look at some of the bigger money losers among its ventures.

TCI Fund Management, a London-based investment fund with a history of pressing companies to change the way they operate, would like to see some of that speculation reined in. In a letter to Alphabet management, TCI managing director Christopher Hohn urged the company to cut costs and rethink investment in areas including self-driving software maker Waymo.

"We are writing to express our view that the cost base of Alphabet is too high and that management needs to take aggressive action," Hohn wrote. "The company has too many employees and the cost per employee is too high."

Hohn notes that the median compensation at Alphabet is $295,884 per year, well above the median at the top 20 U.S. tech companies and substantially higher than at Microsoft.

Alphabet's "other bets" operations, where the speculative investments are held, has generated cumulative revenue of $3 billion but has incurred $20 billion in cumulative operating losses, according to Hohn.

Now what

Big tech has been the darling of Wall Street for nearly a decade now, but as stocks have increasingly come under pressure, activists are taking a look. Meta Platforms was targeted by Altimeter Capital last month, and now TCI has Alphabet in its crosshairs.

There is only so much TCI can do, as Alphabet's dual-class structure means that co-founders Serge Brin and Larry Page control a majority of the company's voting power. But TCI's criticism is likely not new to Alphabet management, as CEO Sundar Pichai has been vocal in recent months about the need to grow more efficient.

The TCI letter is unlikely to lead to drastic action due to the structure of Alphabet, but if the close scrutiny on costs forces management to tread carefully when it comes to expenses and to focus on profitability, shareholders can still be rewarded over time.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Lou Whiteman has positions in Microsoft. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Meta Platforms, Inc., and Microsoft. The Motley Fool has a disclosure policy.