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Google's 3 Biggest Challenges for 2020

Sundar Pichai, who recently took over as Alphabet's CEO, will face a host of tricky regulatory, financial and operational challenges in the new year.
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With Sundar Pichai newly at the helm, Alphabet could be facing one of its most challenging years yet in 2020.

Alphabet  (GOOGL) - Get Alphabet Inc. Report CEO Pichai, who assumed the post Dec. 3., is taking over one of the most influential conglomerates in tech -- and with that comes a host of challenges, including antitrust investigations, employee unrest, and the need to shore up profits as it spends more on research and development. Alphabet shares are up 26% year to date, slightly outpacing the broader S&P 500's gain of 24%.

1. Growing Regulatory Risks

Alphabet formally acknowledged the government’s antitrust probe earlier this year, but it isn’t just U.S. federal law enforcement officials taking a harder look at Alphabet’s business practices. In addition to FTC and DOJ investigations, a coalition of state attorneys general are participating in an antitrust probe of the company. In Europe, Alphabet has faced record fines in recent years for antitrust violations, and the European Commission, the EU’s antitrust regulatory body, recently opened an investigation into Google’s data collection practices, and may include data related to local search services, advertising, ad targeting, login services, web browsers, and others, according to Reuters.

What’s more, public scrutiny of Alphabet could intensify as well. A recent Wall Street Journal investigation found that contrary to some of the company’s claims, it routinely intervenes in search results, even favoring the results generated by big businesses such as eBay over smaller ones. Any such activity is likely to draw the attention of regulators, as well.

What does this add up to for investors? The dark cloud of investigations and potential regulatory action could kneecap its multiple expansion, according to analysts. And with Pichai now alone at the top, “investors might view [his elevation to CEO] as a sign that investigations are going to take up even more time of Alphabet exec team over the near-term,” wrote MKM Partners analyst Rohit Kulkarni in a recent note.

2. Shoring Up Growth, Profits

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For the third quarter, Alphabet posted a mixed earnings report that revealed better-than-expected revenue, but a hit to its earnings -- earnings per share came in at $10.12 versus estimates of $12.42. One reason for that miss, as noted by RealMoney’s tech columnist Eric Jhonsa, was accelerating operating expense growth, along with spending on R&D, sales and marketing and other expenses. It also recorded a net loss in its equity investments last quarter, posting a loss of $1.53B loss versus a $1.38B gain in the third quarter of last year.

Alphabet’s reputation for secrecy often works against it when its updates to investors are mixed. After its first quarter earnings call, for example, Alphabet’s stock hit the skids for weeks -- partly owing to management’s lack of clarity in explaining its missed quarterly revenue and how it might have been affected by changes to its ad products. Meanwhile, investors have expressed frustrations that Alphabet doesn’t break out YouTube revenue, although it’s been long presumed to be a top driver of ad revenue growth for Google.

Alphabet may gradually pull back the curtain on the details of its books, and how they relate to product changes and other initiatives. With Pichai’s appointment, analysts expressed some optimism that the management change could herald a more transparent Alphabet. If it did, that would likely mean good news for investors.

3. Skeptical Employees

Alphabet is still one of the most sought-after employers in Silicon Valley. But a vocal contingent of its workers disagree with the company’s policies and direction. For instance,  Pichai navigated Google through a worker revolt last year over Project Maven, a contract with the military to analyze drone footage. (Google did not renew the contract.)

That was not an isolated incident. In June, a group of workers appeared at a shareholder meeting to protest Google’s handling of sexual harassment complaints and its work on building a censored search engine for China. Google nixed the Chinese search engine, dubbed Project Drangonfly, in July. In November, employees protested the suspension of two colleagues, allegedly over their internal activism.

Having deprecated the “Don’t Be Evil” mantra co-founders Larry Page and Sergey Brin codified in Google’s initial company values, Pichai must determine what kind of company Alphabet wants to be -- and how to sell that message to employees and investors alike. There is optimism that more transparency with investors could be coming on Pichai’s watch, but whether that will extend to Google’s workforce of over 100,000 remains to be seen.