The global tech sector is navigating through a period of severe turbulence following a significant drop in valuations last year, leading to a gloomy Q1 of 2023. The latest in a string of layoffs across the sector has seen Google [NASDAQ:GOOGL] announce they will be cutting 12,000 jobs across its workforce with Spotify [NYSE:SPOT] following suit announcing a 6% reduction of its global staff.
Following 2022’s recurring interest rate increases and soaring inflation, tech companies looking to combat low valuations – which resulted from weak performances – are scrambling to create cost-efficiencies to restabilise their market-cap value. Serving as a testament to this, last week, Microsoft [NASDAQ:MSFT] announced their plans to lay off 10,000 employees, affecting up to 5% of their total workforce.
The news comes following Amazon, Meta, Salesforce and Twitter announcing layoffs that are now reaching nearly 40,000 people since November of 2022.
Investing in technology over people
In light of these recent events, Trachet – a leading tech business advisory firm – highlights some interesting points which have marked a definitive shift for the tech sector resulting in mass lay-offs:
The layoffs appear to follow a plan to restructure resources within the tech industry, by investing in technology over people. This has been seen as Microsoft has confirmed its latest move to acquire ChatGPT, which will see the company invest a reported $10 billion in the AI, with hopes to bring in new consumers.
Alongside plans to restructure, the tech sector has struggled to keep up with its current level of growth which was fuelled by the pandemic. As a result, tech companies are being forced to find quick and efficient ways to compensate for this without losing share value – mainly cutting costs.
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Tech stock normally remains elevated, and investors have previously been able to justify the higher prices due to forecasts of big growth that the companies provide. The result of interest rates being much higher causes future profits to appear less valuable and has significantly played a role in cutting costs within the sector.
Tech sector is desperately reducing head count
Trachet commissioned a research report which unveils a staggering third (33%) of UK workers state they’ve seen have seen their workplace’s headcount decrease and their workload increase in the last 12 months – seemingly causing a mass strain within the UK workforce. Trachet’s data also shows 20% of UK workers state their firm was slow to react and adapt, resulting in a loss of staff.
Our own analysis demonstrates that there are some significant differences between the winners and losers in the tech sector at the moment. Just taking Spotify as an example, the company as seen its financials souring as it has become over-extended. The move to cut costs has led to a rally in the stock price in recent days. London shares in Spotify are up nearly 30% at time of writing. Whether this turns into a longer term trend is another matter.
Compare Spotify with peers in the tech sector like Netflix [NASDAQ:NFLX] however, and you can see the latter is already in much better shape from an investment perspective. Deshe Analytics rates Netflix a 65/100 on its income statement, versus 40/100 for Spotify. Overall, Spotify rates a 51/100 against 83/100 for Netflix.
What this illustrates to us is that, while mass redundancies are going to prompt investors to buy back into tech stocks, investors still need to do their homework, as some of these names will continue to struggle. Spotify, just taking one example, may be rallying now on the back of this news, but investors need to look to the fundamentals to see whether it can provide the impetus for longer term growth.
Too many redundancies now could force tech companies to hire back in with higher wages and more competition to contend with.