Cash-Rich But Cutting Headcount

Earlier this week, we looked at a couple of TikTok videos from a former Google employee in Los Angeles, a day in her life at the company.

Video Length: 00:01:12

And the day she got laid off. 

Video Length: 00:01:35

She was one of twelve thousand Googlers laid off last week, a number which apparently included 31 massage therapists.

A question some investors have asked is why cash-rich, profitable companies like Google's parent Alphabet, Inc. (GOOG, GOOGL). The short answer is that the market is repricing tech industry revenue. 
 

The Repricing of Revenue

Matt Slotnick elaborated on this phenomenon in a lucid Twitter thread this week: 

in 2020 and 2021 the way to create shareholder value was to grow topline. regardless of the quality of revenue, software revenue was being valued at between 30x-100x run rate

— Matt Slotnick (traveling CRM salesman, in nyc) (@matt_slotnick) January 23, 2023

because meaningful cash flow at scale requires a high margin product, high retention, and an ability to upsell and cross sell to drive increasing LTV. once you land, you need to expand share of wallet, continuously. for decades

— Matt Slotnick (traveling CRM salesman, in nyc) (@matt_slotnick) January 23, 2023

so people put a lot of money into companies that were growing like this… pic.twitter.com/ayli69QXC4

— Matt Slotnick (traveling CRM salesman, in nyc) (@matt_slotnick) January 23, 2023

when in reality a lot of these business are destined to look like this pic.twitter.com/whO1hXjkPR

— Matt Slotnick (traveling CRM salesman, in nyc) (@matt_slotnick) January 23, 2023

which is why layoffs are happening, regardless of the amount of cash on the balance sheet. management needs to prove that adding incremental spend drives marginally more return.

it’s a reset on what it means to be a steward of investor capital

— Matt Slotnick (traveling CRM salesman, in nyc) (@matt_slotnick) January 23, 2023

A commenter reading this thread assumed this logic wouldn't apply to big cap tech companies such as Google and Microsoft, Inc. (MSFT), but Slotnick pointed out that size offers no escape here: 

if yesterday a dollar of revenue is valued at 20x, the return hurdle for incremental spend is low

when it goes to 10x, the hurdle is relatively higher, and you now have an inefficient cost structure

— Matt Slotnick (traveling CRM salesman, in nyc) (@matt_slotnick) January 24, 2023

Google And The Next Big Thing

Aside from the repricing of revenue, another caution flag for Google is that it no longer appears to be at the cutting edge of technology. Its dominance in search has led to an explosion in SEO (search engine optimization), which is why you can't Google a recipe without getting a keyword-stuffed essay as a preamble to it. Silicon Valley chatter suggests that enormous advances in artificial intelligence are happening now, and apparently Google is lobbying to shut it down. 

What a reversal from 2003.

Microsoft is becoming Google by out-innovating on search.

Is Google becoming Microsoft by FUDing the competition they can’t beat?

— Balaji (@balajis) January 25, 2023

Investing Implications 

Occasionally, my personal view of securities and the Portfolio Armor system's take on them diverges, but on Google, we're both aligned. Portfolio Armor currently estimates Google will have a positive, but below-market return over the next several months. To me, it doesn't seem like a good long or short candidate; it seems to be in a grey zone where it has become less attractive to growth investors but not cheap enough to entice value investors. I prefer to bet against companies that aren't profitable and cash rich. Speaking of which, let's close with an update one: Bed Bath & Beyond (BBBY). 
 

Blood Bath & Beyond

In a subscriber post a couple of weeks ago, I mentioned that I had bet against BBBY when it rallied to $5.50 for no reason. 

Timing The Top in a Trash 🗑️ Stock $BBBY https://t.co/KNrjdhUGBZ

— Portfolio Armor (@PortfolioArmor) January 14, 2023

BBBY shares plummeted down to $2.52 on Thursday on news that the company had received a default notice from JPMorgan.

No need to bet against companies like Google when meme stock buyers were pumping companies like Bed Bath & Beyond for us. 

More By This Author:

Netflix Expands Its Moat
Timing The Top On A Trash Stock
Riding The Natural Gas Rollercoaster Again