The biggest news from last week is Google CEO Sundar Pichai taking over as CEO of Alphabet (GOOGL - Free Report) as well, and it was accompanied by other news covering labor trouble, European taxes, Verily and Waymo.
Sundar Pichai Takes Over
Google CEO Sundar Pichai is taking over as Alphabet CEO, as founder Larry page steps back from the role, according to a company bog post. Shares reacted positively to the news, as they have to his stewardship of Google (doubling between 2015, when he was appointed Google CEO, and today).
Background: he studied at Wharton business school, Stanford University and Indian Institute of Technology Kharagpur. This was followed by a stint at McKinsey & Co where he worked as consultant. His first interview at Google was on April 1, 2004, the day Gmail launched. He is wiidely credited for making the Google Chrome browser. A year after Pichai took over Android from its creator Andy Rubin, Google shipped 1 billion devices. He went from chief of product and engineering at Google's Internet businesses to Google CEO in 2015 when Alphabet was formed.
So Pichai has been running the show for most of the revenue earning businesses and now he’s taking over running of the Other Bets side of things as well. He has clearly been groomed for the position, including the hassles that come with it. So while there could be some changes with respect to transparency (for instance more information about YouTube, way forward for Other Bets) and increased investment in the cloud (which has actually already started under new chief Thomas Kurian), day-to-day operations will likely be much the same.
That includes employee issues. Google employees have always had more freedom than anyone else for expression and that was in keeping with the startup like atmosphere. Pichai has the difficult role of transitioning the huge company to more of a typical, mature enterprise. In keeping with this goal and perhaps to also reduce the time spent on less fruitful employee interaction, he has reduced the number of employee meetings, discouraged political discussions and fired a few employees that appeared to be engaging in disruptive unionizing.
But there is obviously a backlash from such measures and the fired employees are now taking the matter to the National Labor Relations Board (NLRB). Pichai has also dealt with recent employee unrest over treatment of sexual misconduct by executives, a censored search engine for China, a Pentagon contract that may have helped drone strikes and the usual immigrant and LGBT issues.
Of greater concern at the moment is the regulatory scrutiny by the Justice Department, nearly all 50 U.S. state attorneys general, and as one of four tech giants under an antitrust probe by the Judiciary Committee of the U.S. House of Representatives (mostly Democrats).
Page is clearly not off the hook, although he will likely continue to push Pichai forward: “Congrats on the move, Larry Page!” Democratic presidential contender Sen. Elizabeth Warren, D-Mass., who has advocated breaking up big tech companies, tweeted this week. “Quick reminder: We do still expect you to testify before Congress. And changing your title while staying on the board and retaining effective control of it will not exempt you from accountability.”
President Trump's reelection campaign and several Republican campaign committees are also after it for banning political advertising: "latest arbitrary rule changes are a blatant attempt to suppress voter information, knowledge, and engagement in the 2020 election" and "Google is stifling the ability of citizens to participate in our democracy."
Analysts also had a lot to say.
“We view the streamlining of the management structure as a positive for investors,” said Stifel analyst Scott Devitt.
“While there’s no question that the company will face ongoing regulatory scrutiny, which could lead to some headline risk, the investor community has, to some degree, become numb to this and we believe the positives of the underlying business will outweigh negative newsflow,” Piper Jaffray analyst Michael J. Olson said.
Dan Ives, equity research analyst at Wedbush Securities, said, “When you look at a lot of the initiatives that Alphabet’s doing and where the company is heading strategically, I think the cloud continues to be a focal point for him and the team… I think we could see more (mergers and acquisitions) as well as organic initiatives.”
“He's [Pichai] a long-standing executive with the company. And I think that's important,” D.A. Davidson senior research analyst Tom Forte told Yahoo Finance. “Look at some of these long-term bets that they've made. They actually beat Amazon (AMZN - Free Report) on the first commercial drone delivery, which was Google, and not Amazon, with Walgreens. And I think you're starting to see some traction on the self-driving car front.”
MKM Partners analyst Rohit Kulkarni called the management change a “non-event” for Google’s immediate prospects, Pichai’s appointment may be viewed as shareholder-friendly and extending the trend of more disclosures and stock buybacks. Pichai has “developed a positive aura and stellar reputation since he became the CEO.”
Labor Group Goes for Google
The Communications Workers of America union has charged Google for firing four employees (Laurence Berland, Paul Duke, Rebecca Rivers and Sophie Waldman) that they claim were facilitating unionizing at the tech giant. But there seems to be a gap in understanding what goes for allowed and protected grounds for unionizing and what doesn’t.
As far as Google is concerned, it has fired people engaging in “intentional and often repeated violations of our longstanding data security policies, including systematically accessing and disseminating other employees’ materials and work”. It categorically says that no one was dismissed for “raising concerns or debating the company’s activities.”
The employees say that they only shared what was freely shared within the company. Moreover, since employees are the ones that build its successful products, they wouldn’t allow interference in their rights to “organize for better working conditions, including ethical business practices.” The last few words seem to indicate that it wasn’t the “workplace issues” that Google earlier committed to allow employees, as much as other matters related to the kind of business Google could do, as well as any stand that it might take with respect to immigrants, LGBTs, etc.
Obviously, today these issues are both political and workplace and there’s no clear line of demarcation between them. So Google feels the employees crossed the line, while they feel they didn’t. At any rate, the four fired employees intend to take the matter to the National Labor Relations Board (NLRB), which usually tries to bring about an understanding between the employer and the employees.
Europe’s Digital Tax
A number of countries are taking measures to tax global technology companies in the countries they generate revenue. France has taken the lead, with a 3% revenue tax on companies with at least 750 million euros ($845 million) in global revenue and digital sales of 25 million euros in France, after failing to instigate an EU-wide tax because of opposition from Sweden, Finland, Denmark and Ireland.
France proposes to tax Internet companies based on their “digital presence” (number of users) in a country rather than where their headquarters may lie or where they book profits. The changed focus is being justified by dint of the data-driven business models of digital companies, since data is collected in proportion to the digital footprint.
France has however said that this revenue tax, applied retrospectively from Jan 1, 2019, will only remain in force until the 36-member Paris-based Organisation for Economic Co-operation and Development (OECD) arrives at a desirable solution (expected sometime next year). France says that the average tax on digital companies in the EU is only 9.5% compared with 23.2% for other companies. EU antitrust chief Margrethe Vestager is looking for a global agreement, failing which she will try to reach common ground with EU member nations.
The companies in the low-tax group are mostly American companies like Alphabet, Apple (AAPL - Free Report) and Facebook (FB - Free Report) but also include British, German, French and Chinese companies. President Trump however sees this as an anti-America move, claiming that American companies should be taxed only in America even when they generate billions abroad. He also threatened increased tax on French goods as a retaliatory measure.
Robert Lighthizer, the chief U.S. trade representative says that there’s scope for $2.4 billion in new tariffs on French cheese, wine and other products. France promises EU-wide retaliation. The President also said this is not the way allies should function (referring to their membership of NATO, which France has earlier called a brain-dead alliance).
Meanwhile, other countries like Austria, Spain, Belgium, Turkey, Italy and Britain are looking to go the same way as France rather than wait for an EU-wide solution. The UK’s antitrust watchdog is also investigating Alphabet’s $2.6 billion Looker acquisition.
The tech-focused nonprofit, OneFifteen, formed by the combination of Kettering Health Network, Premier Health and Alphabet’s Verily (the company’s life sciences research arm) to deal with the opioid crisis (and other substance abuse), just started operations at Dayton.
While current services are limited to outpatient, inpatient withdrawal management spaces for up to 12 patients will be available next year. The plan is to eventually offer intensive outpatient and residential treatment, co-occurring mental health treatments and medical care services.
To make all this happen, Verily is investing an additional $5 million to construct a 5,000 square foot facility to treat an additional 30 patients and offer detox services to nearly 1,300 patients a year.
A crisis stabilization unit will open at the Kindred Hospital Dayton in early 2020.
Verily management believe that the unit fills a gap in the Greater Dayton area. They say that the number of substance abuse treatment centers per capita in Montgomery County is 44% lower than the national average.
One of Alphabet’s “other bets’ may be paying off. The automated driving startup, which was spun out as Waymo, hit important milestones of 100,000 rides and over 1,500 monthly active riders (those who took at least one ride in the past 28 days). The service has been available to a very small group of a few hundred Android users in the Phoenix Arizona area since Dec 2019.
Commercialization is clearly entering the next phase because last month, it started adding fully automated cars (no human driver present) to the fleet. And now, it has added the first iOS app so Apple users can also hail rides.
Stifel's Scott Devitt upgraded Alphabet stock from hold to buy and raised his price target from $1,325 to $1,525.
"We are encouraged by Google’s continued share gains of advertising dollars and see a continued runway for healthy revenue growth, leading us to raise our long-term properties revenue estimates," the analyst said. He added that in recent times, “Google search ecosystem participants have reported [search-engine optimization] headwinds, which may signal incremental monetization of search traffic on Google."
The price target was raised on the stock’s reasonable valuation (relative to its history) and durable earnings growth.
He also said that it’s too soon to predict what Pichai might do with other bets in his new role, but he assumes that the new CEO "will keep the long-term portfolio objectives focused with investors in mind."
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