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Layoffs at Alphabet are the latest sign Big Tech is finally taking steps to manage ballooning expenses

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1 year ago

January 21, 2023

Google parent Alphabet (GOOGL) on Friday became the latest technology giant to lay off thousands of workers — a move we expected from the Club holding given falling advertising revenue and growing fears of a recession. “I take full responsibility for the decisions that led us here. Over the past two years, we’ve seen periods of dramatic growth. To match and fuel that growth, we hired for a different economic reality than the one we face today,” Pichai wrote. Shares of Alphabet, which had plunged by nearly 39% in 2022, rose more than 5% on the news to $98.02. Alphabet’s digital advertising business, from which it generates most of its revenue, has taken a hit as businesses rein in ad spending in a slowing economy. The company reported a poor third quarter in late October, with YouTube ad revenue down and growth at Google search ads slowing. Like many big technology firms, Alphabet overhired during the height of the Covid pandemic to meet burgeoning demand. Here’s a rundown of all the layoff announcements among our Club tech stocks and whether they’ve gone far enough, starting with the most recent. Alphabet The news: Alphabet CEO Sundar Pichai announced the headcount reductions in an email to staff Friday, saying the firm plans to eliminate around 12,000 jobs or 6% of its global workforce. Pichai said layoffs in the U.S. would begin immediately. GOOGL 1Y mountain Alphabet (GOOGL) 1-year performance The Club take : We’ll be looking to see whether the layoffs extend to a pullback in capital expenditures when the company reports fourth-quarter results on Feb. 2. Microsoft The news: Microsoft (MSFT) on Wednesday said it was laying off 10,000 employees , nearly 5% of its workforce. The job cuts come as revenue growth is slowing. CEO Satya Nadella told CNBC in an interview earlier this month that he expects the next two years to be challenging for the tech industry. MSFT 1Y mountain Microsoft (MSFT) 1-year performance The Club view: Microsoft’s job cuts were the right move, but we remain cautious on the stock and suspect more layoffs could be on the horizon. At the same time, we think the software giant still has long-term potential, with growth opportunities around artificial intelligence. Shares of Microsoft climbed more than 3.5% to $240.22 apiece. Amazon The news: After the bell on Jan. 4, Amazon (AMZN) CEO Andy Jassy announced 18,000 job cuts at the e-commerce company. Amazon had hired roughly 300,000 workers during the pandemic, as demand for online shopping exploded. But when that demand receded last year, Amazon was left with unsustainable expenses. AMZN 1Y mountain Amazon (AMZN) 1-year performance The Club view: Amazon did not go far enough in its cost-cutting efforts. If it were to further reduce its workforce, the stock could go higher. Amazon’s cloud unit, Amazon Web Services, is a growth engine for the company where management should put its focus. Shares of Amazon were up more than 3% Friday afternoon, at $96.51 apiece. Salesforce The news: On the morning of Jan. 4, Salesforce (CRM) said it would cut 10% of its workforce, impacting more than 7,000 workers . The staff reductions are part of a cost-cutting plan to improve profitability amid slowing sales growth. The company had experienced massive growth during the pandemic, as businesses accelerated their digital transformation and cloud adoption. CRM 1Y mountain Salesforce (CRM) 1-year performance The Club view: Salesforce’s layoffs accounted for underperforming employees in its sales business, an area where CEO Marc Benioff had concerns around productivity. If sales prove weaker than expected this year, more job cuts could be on the horizon. Salesforce closed up around 3.3% Friday, at roughly $151.25 a share. Meta Platforms The news: Meta Platforms (META), back in November, announced it was l etting go of 11,000 employees , or 13% of its workforce. CEO Mark Zuckerberg made the decision after the Facebook parent reported disappointing third-quarter results, along with mounting costs and expenses. Investors were particularly frustrated by Meta’s heavy investment in the metaverse, sending the stock tumbling by nearly 25% after the earnings release in late October. META 1Y mountain Meta Platforms (META) 1-year performance The Club view: Meta’s job cuts show that the company is working to better manage its costs, even if it is set to continue losing money in the metaverse. The company should rein in spending on the metaverse and put that money toward stock buybacks and its Reels video offering. Still, the company’s fundamentals, including engagement on Facebook and Instagram, is holding up. Meta gained nearly 2.4% on Friday to $139.37 a share. Bottom line Alphabet and other Big Tech players can’t control the tough economic environment, but they can control how they manage expenses. The layoffs we’ve seen thus far are a good start. But while eliminating jobs is a step that can alleviate pressure on revenues, cutting their bloated workforces is only one aspect of the overall reductions in costs and expenses needed at these firms. All these companies are seeing their revenue growth slow after a pandemic pull-forward, and now they need to adjust their expenses to reflect this new reality. The mega caps are finally putting into motion the plans we have wanted them to enact for months, and the companies have been rewarded with higher stock prices. We’ve been concerned about the slowdown in sales, but the layoffs thus far will produce higher earnings in 2024, making the stocks actually cheaper than what they were at the start of the year. (Jim Cramer’s Charitable Trust is long GOOGL, AMZN, META, MSFT, CRM. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A sign is posted in front of a Google office on April 26, 2022 in San Francisco, California. Google parent company Alphabet will report first quarter earnings today after the closing bell.

Justin Sullivan | Getty Images News | Getty Images

Source: CNBC

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