Big tech companies experienced a 5.6% bump in their stock price this month following an announcement of job cuts
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Bloomberg News
Subrat Patnaik and Ryan Vlastelica
Published Jan 25, 2023 • 3 minute read
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view of the main lobby of building BV200, during a tour of Google’s new Bay View Campus in Mountain View, Calif. Photo by Peter DaSilva/Reuters files Massive job cuts in Silicon Valley are bringing some relief to investors after a year-long stock selloff, as companies indicate they’re focused on bolstering their profits heading into a key earnings reporting season.
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Big tech companies including Alphabet Inc. and Salesforce Inc. experienced, on average, a 5.6 per cent bump in their stock price this month in the session following an announcement of job cuts, according to data compiled by Bloomberg.
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“This is a decade overdue, but I am very glad to see these encouraging steps toward focusing on margins,” said Gene Munster, co-founder and managing partner at Deepwater Asset Management, who expects an additional 15 to 20 per cent reduction headcount at Big Tech beyond what has already been announced.
Looking past the short-term pop in stock prices, the risk is that the job cuts won’t be enough to offset the drop in earnings from a weakening economy. For now, investors broadly are optimistic that that won’t be the case: The Nasdaq 100 index has risen 8.7 per cent from its bear-market low in December, outpacing the S&P 500’s 4.8 per cent increase.
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Munster owns shares of Meta Platforms Inc., which announced layoffs last year, as well as Alphabet and Apple Inc. He said he wants to see companies give cautious outlooks when they report earnings in order to be confident that a bottom in stock prices has been put in place.
“Some companies have gotten too much credit for modest cost reductions, which means we could be due for a pullback if numbers haven’t been fully de-risked,” he said.
Easy money In the last bull market, ultra-low interest rates made it easy for companies to borrow money and fuel growth at any cost. Sales surged and margins were squeezed as companies heavily invested in expanding their footprints and headcount.
Fast forward to 2022, when easy money evaporated as the U.S. Federal Reserve tightened monetary policy to control rising inflation. With the threat of a looming economic slowdown or recession, investors began clamouring for a heightened focus on maintaining profits and margins to offset weaker revenue growth.
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Article content Activist investors have joined in to acquire stakes in large companies such as Salesforce and Walt Disney Co., and could pressure them to cut costs.
Of the biggest technology and internet companies, which together employed more than 2.2 million people as of their last fiscal year, Apple is the only one that hasn’t announced large-scale job cuts; it instead paused hiring for many jobs outside of research and development.
“With the exception of Apple, which didn’t overhire, a lot of big tech companies bit off more than they could chew, and right now they’re in the process of reversing their frothy years,” said Yelena Maleyev, an economist at KPMG International Ltd.
Microsoft cloud Analysts predict that fourth-quarter tech earnings will show the steepest drop since 2016. Microsoft Corp., which kicked off the industry’s reporting late Tuesday, said revenue growth in its Azure cloud-computing business will decelerate this quarter and warned of a further slowdown in corporate software sales. The company said last week it’s cutting 10,000 jobs.
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Article content Big Tech layoffs are hitting diversity and inclusion jobs hard Wave of tech layoffs tips power back in favour of employers in sector Microsoft, Amazon set to erase 28,000 jobs as tech slump deepens Microsoft is the biggest drag on key U.S. benchmarks on Wednesday after it delivered a forecast that flagged several headwinds for the technology sector.
The combination of lower costs along with durable fundamentals could set tech up for gains when the economy eventually picks up steam, according to David Waddell, chief executive and chief investment strategist at Waddell & Associates LLC.
“Cost cuts in 2023 queue up exponential profit expansions in 2024,” he said. “The more costs they cut today into a shallow recession, the more profits they earn in the subsequent expansion.”
He suggested that the market may need to consolidate its recent gains, “but there is no need to revisit the October lows.”
— With assistance from Maxwell Zeff.
Bloomberg.com