The Ratings Game: Alphabet CEO change could bring more transparency and larger buybacks, analysts say
The departure of Google co-founders Larry Page and Sergey Brin from managerial roles at Alphabet Inc. marks the end of an era for the search-engine giant, though analysts doubt there will be meaningful changes in the way the company is run.
Investors, though, may take comfort in the chance of a shift in how the company approaches its financials now that Google CEO Sundar Pichai has been elevated to the top role at parent company Alphabet
as well. Analysts say the leadership transition could prompt a greater reception to share purchases going forward as well as usher in more transparent financial-reporting practices.
“As part of this strategic review process, we expect management and the board to…re-evaluate Google’s approach to capital returns, whereby the company had ~$31 billion remaining on its Class C repurchase authorization and ~$121 billion in cash and equivalents as of 3Q19,” JMP Securities analyst Ronald Josey said in a note to clients. Already the company has become gradually more open to buybacks, repurchasing about $12.3 billion of shares so far this year, compared with $9 billion in all of last year, Josey wrote.
J.P. Morgan’s Doug Anmuth as well said that it’s “possible that Alphabet could become more amenable to larger share buybacks,” though he highlighted that Brin and Page are still on the Board of Directors, which could limit the adoption of new capital-return tactics.
For JMP’s Josey, the leadership shift could also help turn Alphabet into a more transparent company when it comes to how it reports financials to investors. Alphabet is a sprawling business that includes search advertising, YouTube, and “other bets” like self-driving cars, but the company has drawn criticism for its track record of vague earnings commentary, which some analysts say is holding back Alphabet’s stock.
Alphabet has also attracted the attention of the Securities and Exchange Commission, which has inquired about the company’s segment reporting and its choice not to disclose YouTube revenue even though the platform is a big contributor to the overall business. Based on Alphabet’s rationale at the time for veiling that segment performance, the company may have to change its practices now that Pichar, who oversees YouTube as part of his role as Google CEO, will also be in charge of Alphabet, the entity responsible for reporting financials to investors.
Though Josey isn’t expecting any big shifts in the immediate term, he wrote that Pichai and Chief Financial Officer Ruth Porat “may use this change as an opportunity to rethink current disclosures and reporting to improve the overall transparency across the businesses,” which is “likely to be positive for shares.”
Alphabet shares are reacting positively in Wednesday’s session, up 1.6% in morning trading compared with a 0.7% gain for the S&P 500
The stock has risen 26% so far this year, as the S&P has climbed 24%.