Chronicle - Jan 28, 2024
Tech Layoffs Continue?
Tech layoffs soared, the most since last March. Investors cheered the moves, pushing Nasdaq to almost all time high in January.
Year-to-date, a staggering 24,000 employees across 95 tech companies in the U.S. have faced layoffs, marking the most substantial workforce reduction since the early waves of 2023 that reverberated through the tech sector. Notable among the companies executing these layoffs are industry giants, including Microsoft, which let go of 1,900 employees in its gaming division; SAP, which implemented an 8,000-employee reduction; and Twitch, which downsized its staff by 35%.
We can guess several reasons for the layoffs.
For smaller companies, a high-interest rates environment can make fund raising challenging. Consequently, they are compelled to adopt more prudent budgetary measures, with reducing the workforce as one of the fastest solution to improve cash flows.
Interestingly, layoffs are also occurring in big companies with massive earnings. Microsoft, SAP, and Twitch have billions in net profit. If smaller companies implemented layoffs as a matter of survival, why did the bigger companies do the same?
They might have identified some slackers in their workforce, but the share price might be another motive as well.
In early 2023, the wave of layoffs was followed by a significant surge in tech stocks' share prices. According to Barron's, as illustrated in the following chart, there is a direct correlation: the greater the number of layoffs, the more pronounced the increase in share prices.
Fundamentally speaking, a reduction in employee costs can help management meet quarterly guidance. However, investors may not need to wait for quarterly numbers to emerge; just the news of layoffs can make investors smile.
No one expects a repeat of the 2023 bloodbath where 260,000 tech jobs were cut, but this might be a new quarterly trend going forward.
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