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Alphabet (GOOGL) Appoints New CEO Who Must Now Navigate Treacherous Waters

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Google (GOOGL - Free Report) co-founders Larry Page and Sergey Brin stepped down from active management of the internet giant’s parent company Alphabet. Larry Page surrendered his immediate control to Google’s existing CEO and Sergey Brin will step down as president of Alphabet and the role will be eliminated.

Page and Brin will remain on Alphabet’s board and will still together control a majority of voting power over decisions due to Alphabet’s dual-class share structure. “With Alphabet now well-established, and Google and the Other Bets operating effectively as independent companies, it’s the natural time to simplify our management structure,” Page and Brin wrote in a blog post.

 “We’ve never been ones to hold on to management roles when we think there’s a better way to run the company. And Alphabet and Google no longer need two CEOs and a President.”

Larry Page became the CEO of Alphabet in 2015 when the tech giant elected to form the parent company to oversee its “Other Bets” outside of its search and digital ads business. Sundar Pichai became the CEO of Google after running much of the business operations at Google that Page left behind to focus on other endeavors.

Intrinsic & Regulatory Hurdles

The management shakeup cements Pichai as one of Silicon Valley’s most prolific figures. Along with the power and notoriety, he inherits Alphabet’s regulatory and internal problems.

Pichai’s purview now extends past his regular obligations at Google into Alphabet’s innovative ventures like driverless cars, high-altitude balloons, and even prolonging life. These initiatives haven’t yet seen success and many of them weigh on the firm’s bottom-line.

Now the question may be, will Pichai continue these capital-intensive endeavors or just cut his losses and scrap the initiatives?

The new CEO also must address the employee protests. Google employees voiced their disapproval last year over the way that the company handled sexual harassment as hundreds of employees walked out of Google offices around the world. The firm reportedly paid a $90 million severance package to Andy Rubin despite finding sexual misconduct claims against him to be credible, according to a New York Times investigation.

Pichai also must now navigate through the antitrust probes launched by several regulatory agencies. Nearly every state attorney general in the U.S. is looking into antitrust violations related to Google’s ad business and the probes may even expand into Google’s search business as well. The FTC and Department of Justice are also looking into Google’s operations for possible antitrust violations. With regulatory hurdles coming from so many different angles, Pichai must now navigate the company through the treacherous waters.

Outlook & Financials

Meanwhile, the new CEO must figure out how to rejuvenate its core digital advertising business, which has been slowing as competitors like Amazon (AMZN - Free Report) chip away at its market share. Amazon is projected to claim 8.8 percent of U.S. digital ad spending in 2019, up from 6.8 percent in 2018, and could reach 10 percent by next year. Google is projected to lose 1 point of market share, dropping from 38.2 percent to 37.2 percent.

Sundar will also be pressured to expand its cloud computing business as more enterprises move toward the cloud. While its cloud business has done well lately, it still only makes up a small portion of its total revenue.

Our Q4 consensus estimates call for Google to see a top-line hike of 20.75% to $38.45 billion and a bottom-line pop of 0.08% to $12.78 per share. Advertising revenue is projected to grow 16.8% to $38.1 billion in the fourth quarter.

Our full fiscal 2019 estimates forecast net revenue to climb 20.56% to $132.72 billion and earnings to jump 6.64% to $46.60 per share. Our fiscal 2020 estimates call for earnings to grow 17.35% to $54.68 per share and for sales to spike 18.03% to $156.66 billion.

Google shares are up around 1.8% today and GOOGL stock sits at a Zacks Rank #3 (Hold). GOOGL shares have climbed about 26% in 2019. These gains are significantly less than its tech giant peers such as Apple (AAPL - Free Report) and Microsoft (MSFT - Free Report) who are up 66.2% and 47.4%, respectively.

Wall Street may be cautious moving forward about the management shakeup Google just experienced. The company is left in the hands of Pichai who is experienced with the operations of the company, which should help smooth the big transition. Investors should look to see what the new CEO’s plans are to optimize the firm’s operations, rejuvenate its advertising business, and jumpstart its cloud growth.

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