Job Cuts Throughout the Industry:
Over the last 3 months, most of our country’s largest and best-known technology companies have announced layoffs. Most of the management teams are citing fears of a recession in 2023 as the reason for these cutbacks. Clearly, job cuts are bad for employees and workers who lose their jobs. I’ve been in that group a couple of times in my career. It is horribly anxiety provoking and I wish it on no one. However, are announced job cuts sometimes good news for investors?
I’m Chris Perras, Chief Investment Officer with Oak Harvest Financial Group. News or Noise is our investment team’s bi-weekly session when we examine a news item, headline, or story making the rounds from publicly available sources and ask, “Is it News or Noise?” for your money. This week we get into the recent round of job layoffs, primarily in the technology sector, and what it might mean for investors.
Over the past few months, Microsoft announced it will cut 10,000 jobs, about 5% of its employees. It blamed macroeconomic conditions and changing customer priorities. Amazon has announced a couple of rounds of layoffs at both their distribution network and other areas amounting to almost 28,000 jobs. Salesforce announced 10% cutbacks in their staff or about 8,000 employees.
The list goes on and on. According to Crunchbase News, there were 107,000 tech jobs lost in 2022 from both public and private tech companies and the announcements have only picked up steam in January. This is bad news for employees of course.
However, we often get asked by clients and prospects “why did XYZ’s company stock rise when they just slashed 5 or 10% of their workforce”?
The blunt answer is that free-functioning capital markets look at employees and jobs as a cost line item on the income statement. Fewer bodies and workers would translate to additional cash for shareholders, all other things staying the same in a company’s business. However, clearly, if a company is making large layoffs, business isn’t as good as it was 3, 6, or 12 months ago.
Technology companies are particularly interested when it comes to layoff announcements and job cuts. The reason why so many of the most valuable companies in the world have come from the tech sector is the scalability and leverage that many of these companies have. They often create, own, and distribute intellectually generated products and revenue. Heck, companies like Google, Facebook, and Tick Toc actually have users creating content and product to distribute for free.
Software companies have engineering teams writing software code that if commercially successful, can be distributed merely by clicking on a button and either downloading the software to your desktop or more recently accessing it where it resides in the cloud. This is extremely profitable if there is end demand.
Successful technology-based companies are it Microsoft, Google or Salesforce have some of the highest revenue per employee, operating cash flow per employee, and marginal return on invested capital of any business in the world. These companies generally run with very low PPE or fixed investment. Their employees and their salaries are most often really their “inventory” when times are good.
When times are good, the gating factor to their growth is how many new corporate salespeople they can hire, or can they get more engineers to develop a new function that customers might bite on for an upgraded sale.
In early 2020, pandemic lockdowns made internet applications more important to people. Consumers were stuck at home and many businesses had to quickly retool to a work-from-home environment. Much like the mass technology spending in front of Y2K in 1999, business spending on technology accelerated and boomed in the 2h2020 and the first half of 2021.
As sales and profits accelerated into early 2021, most of these companies added large numbers of employees to meet the demand that management teams thought would be the new trend and baseline. Unfortunately, this hasn’t happened. Growth peaked in mid-2021; it quickly slowed in 2h2022, and companies are now having to readjust. Now, they are downsizing to meet a lower level of end demand.
The same thing happened in the product and goods sector of our economy, but it was more visible to most and hit earlier. Think of the pull forward of demand for exercise equipment into December 2020. Peloton thought they had an insatiable demand for their products.
They ordered tens of thousands of bikes and treadmills from China, and by the time they got to the USA, the demand was gone, the company was over-inventoried, and they had to slash prices on their products and lay off hundreds of employees. In mid-2021, Target and many other retailers suffered the same fate as Peloton of mistaking a pull forward in demand as the “new normal”.
Right now, with the economic slowdown central banks are creating, it’s the technology sector’s time for adjusting and downsizing to the right size for demand. The main lever these high intellectual properties, low tangible asset companies like Microsoft, Google, and Salesforce have to pull, are jobs.
These stories make for sensational headlines, but it is part of the standard business cycle playbook for public management teams if one believes in a continued Fed-induced economic slowdown or even a recession down the road. The result, if and when business stabilizes, recovers, and or accelerates? These companies’ marginal ROIC will improve, and shareholders will be more fully rewarded with higher returns. Unfortunately, these stories are bad news for employees, but often good news in future quarters for investor returns.
Are you trying to meet your needs or your greed in retirement? Give us a call here and schedule an initial consultation with an Oak Harvest Advisor. We will sit down with you, and help you and your family do the math to figure out if you will be able to meet your retirement goals and needs.