‘It can’t be good circumstances if you’re getting rid of 10,000 people’
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Bloomberg News
Ryan Vlastelica
Published Jan 10, 2023 • 3 minute read
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An Amazon.com Inc. delivery worker pulls a delivery cart full of packages in New York City, U.S. Photo by Brendan McDermid/Reuters/File Photo Tens of thousands of tech sector job cuts may not be enough to reverse the collapse in share prices, given the looming economic downturn could slash companies’ revenues far more than the cost savings they make via layoffs.
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Amazon.com Inc. last week announced more than 18,000 job cuts, the biggest reduction in its history, while Salesforce Inc. said it would cut about 10 per cent of its workforce, adding to the toll in a sector that has been scrabbling for months to retrench. Industry tracker Layoffs.fyi estimates 18,300 employees have been let go this year, following the loss of 154,000 jobs in 2022.
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Amazon rose 1.6 per cent on Tuesday, while Salesforce gained 0.6 per cent. The Nasdaq 100 Index rose 0.3 per cent.
Investors have applauded the cuts on the expectation that they will help protect margins; Salesforce, for instance, has rallied since its announcement, while shares in Facebook owner Meta Platforms Inc. have rebounded 34 per cent since it announced it would cull more than 11,000 jobs.
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Yet in an industry that hired prolifically during its pandemic boom years, the cuts may be too little, too late, analysts say. For many, share prices do not yet reflect how much of a hit profits will take as demand for tech cools in a slowing economy.
“Layoffs should be a move of last resort, so it can’t be good circumstances if you’re getting rid of 10,000 people,” said Ashwin Alankar, head of global asset allocation at Janus Henderson Investors. “It tells me demand is much worse than the market expects, which suggests multiples need to contract more.”
Tech shares could see an additional 20 per cent downside in a worst-case scenario, he said, following last year’s 33 per cent drop in the Nasdaq 100 index, its worst performance since 2008.
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“The market is focusing on what companies can grow in this environment, so if the layoffs portend something more than a cutting of COVID fat, then estimates still look too high and valuations still look expensive,” he added.
Analysts have already slashed revenue growth estimates for tech companies to 2.4 per cent for 2023, versus a consensus projection of 5.4 per cent just three months ago, according to Bloomberg Intelligence. The collapse in earnings expectations is even starker; they are now seen falling 2.2 per cent this year, compared with the prior projection of 4.3 per cent growth.
Many investors see the cuts as a positive trend, at least from an investment perspective, given they have helped lift the tech-heavy Nasdaq 100 index almost three per cent since November.
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But the cuts will not be enough, reckons Mike Wilson, chief U.S. equity strategist at Morgan Stanley.
“(Tech firms) are not good at cost cutting and they will be late on that,” Wilson told Bloomberg Television’s Surveillance. “It will take longer than you think, and the margin degradation can be more severe in those areas.”
Bloomberg.com