Jan 12, 2023 - Economy

Tech layoffs are a stock price problem, not an economic problem

Illustration of a stack of pink slips with a pointing finger cursor holding them up

Illustration: Natalie Peeples/Axios

In Silicon Valley, it's raining pink slips.

Driving the news: From behemoths like Meta and Amazon to rising stars like Salesforce and Stripe to idiosyncratic cases like Twitter, and whichever rickety crypto concern you pick, thousands of tech workers got a firsthand look at the underside of tech's boom-and-bust cycle in recent weeks.

Why it matters: Some cite layoffs as proof the economy is in the early stages of a widely forecast downturn.

💭 Our thought bubble: Executives always have a huge incentive to cast setbacks as economic issues, rather than company shortcomings. But we're skeptical that the turmoil in tech is much of a leading indicator for the U.S.

Be smart: It receives an outsized share of media attention, but in terms of employment, the information technology industry employs only about 2% of all U.S. jobs or around 5 million people.

  • Despite the tech bloodletting, the latest U.S. jobs report showed steady hiring overall — and in December, unemployment was at 3.5%, near a half-century low.

The big picture: The fact that these future-focused firms are cutting back doesn't necessarily mean executives see a serious downturn on the horizon for the customers they serve.

  • Some analysts think tech's recent jettisoning of employees is driven more by market scrutiny of some of the bad ideas tech "geniuses" have dumped money on in recent years — rather than economic fundamentals. Those costs are now devouring sales dollars that would otherwise turn into profits.
  • In many cases, tech companies over-hired to feed these initiatives.
  • And while analysts think sales and earnings in the U.S. tech sector will slow a bit over the next year, they don't believe the slowdown will be particularly steep.

Context: Tech stocks suffered a shellacking for the ages last year, as the Nasdaq composite index plunged 33%, the fourth worst year for the index since its inception.

  • That collapse wasn't driven by broad expectations that sales will shrink or profits will turn to losses for Nasdaq companies over the coming year — something you could interpret as a pretty worrisome indicator of where GDP is heading.
  • Rather the driver was valuations on those future earnings — the all-important price-to-earnings ratio — which tumbled automatically as interest rates rose this year. That is particularly painful for tech stocks.
  • Analysts see tech profits continuing to rise — though at a slightly slower pace due in part to the surge of poorly thought-through spending that tech firms did when their share prices were flying high in 2020 and 2021.

What they're saying: "Tech companies were spending money like Mötley Crüe in 1990," says Dan Ives, a longtime tech stock analyst at Wedbush Securities, invoking the glam metal band at the apex of rock n' roll excess.

The bottom line: If tech CEOs want to hang on to their incredibly well-paid jobs, they need to be seen doing something to try to reverse the trajectory. Layoffs are a tried-and-true tactic to appease investors that want action.

  • "These management teams are reading the room and understand that the Street wants to see cuts," Ives tells Axios.

What we're watching: Earnings, of course. A parade of top-tier tech outfits begins reporting Q4 2022 results in a couple of weeks, so we'll see if job cuts continue — and how the market reacts.

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