Markets are betting that Alphabet's (GOOGL) leadership change will be a net positive for shareholders.
On a day during which the Nasdaq rose 0.5%, Alphabet's Class A and C shares rose about 1.9% following news that Google CEO Sundar Pichai is replacing co-founder Larry Page as Alphabet's CEO. To put it another way, Wall Street added about $15 billion to Alphabet's market cap following the news beyond what the stock would have gained if it had just matched the Nasdaq's rise.
As others have noted, it's far from certain that the C-suite shakeup will result in major changes. As it is, both Page and fellow Google co-founder Sergey Brin have been steadily reducing their day-to-day involvement with Alphabet for some time. And on the flip side, Page and Brin still control 51% of Alphabet's voting rights between them, and thus have the de facto final say on major corporate decisions.
But as Page and Brin spell out in the letter announcing Pichai's new job, this move does yield one important change to Alphabet's org chart: Pichai will now be officially responsible for managing not just Google proper, but the money-hemorrhaging Other Bets reporting segment.
Among other things, Other Bets contains Waymo, Google Fiber, the Verily life sciences unit, the Calico anti-aging unit, the DeepMind AI research unit, the X "moonshot" project unit and Google's investment arms. The segment has recorded more than $10 billion worth of operating losses since Alphabet adopted its current operating structure in 2015, and the consensus for this year is for Other Bets to post a $3.59 billion operating loss (up from $2.87 billion last year) on revenue of just $661 million (up 11% and mostly provided by Google Fiber and Verily).
Naturally, there's some hope that giving Pichai official responsibility for Other Bets will result in the unit running a tighter ship, even if Brin and Page could potentially veto any big moves planned for the unit. For example, maybe Pichai pares back some of Waymo's spending until the company's self-driving tech is ready for a broader commercial launch, or perhaps he axes some of Other Bets' more speculative projects that have seen limited progress to date, such as Calico or the Project Wing delivery drone initiative.
Another possibility, Pichai's presence results in some major tactical decisions being made for Other Bets units -- decisions that Page may have been less prone to making in recent years as he reduced his involvement with Alphabet -- that put the businesses on stronger footing, even if they don't necessarily lower their near-term losses.
Possibilities here include making a stronger effort to ink deals between Waymo and major automakers (to date, Waymo's ability to strike such deals has been hampered by automaker worries about losing control of the user experience), and having Google Fiber, which halted its last-mile fiber expansion in early 2017, step up its investments in fixed-wireless broadband.
Theoretically, making Pichai Alphabet's CEO could also give him more leeway to push through something such as large stock buybacks or a quarterly dividend. While Alphabet launched a $25 billion buyback authorization in July, the company has been a more restrained buyer of its stock than many other big-name tech companies. And though the company has a sterling balance sheet and is expected to produce about $30 billion in free cash flow this year, it has remained reluctant to pay a dividend. However, it's worth pointing out here that CFO Ruth Porat, who would presumably have a big say when it comes to such moves, has long been the CFO of both Alphabet and Google.
Another possibility raised by analysts: Alphabet becomes more transparent going forward regarding the performance of various businesses. The company still doesn't break out the top-line performance of Google Search and YouTube (its biggest revenue-generators), never mind smaller businesses such as the Google Cloud unit or Google's consumer hardware operations.
But even if Pichai's promotion ends up having no impact on Alphabet's policies in areas such as capital returns or M&A, a meaningful improvement in Other Bets' financial performance and business execution could by itself be worth a $15 billion increase in Alphabet's market cap. Only time will tell whether this happens.