The seemingly endless waves of job layoffs in the tech industry make for grim reading, especially amid stubborn inflation. But layoffs are nothing to worry about as long as underlying fundamentals remain robust.
It feels like we’ve been inundated by headline after headline announcing continued mass layoffs. In fact, according to tracking site layoffs.fyi, the trend started in 2022 with around 16,400 layoffs across 1,058 companies globally.
And we’re not even close to done – thus far in 2023, we’ve already exceeded last year’s levels with nearly 21,300 layoffs. This was reaped from a smaller number of companies – 830.
By the way, they are mostly from one sector – tech companies. What's even more concerning - many of these layoffs involve some of the biggest names in the stock market, including Amazon, Microsoft, Meta and Google, which all reduced jobs by at least 6-figures. Even Singapore-based companies including Grab are also impacted.
What’s behind tech company mass layoffs, how much do such events cost, and what impact – if any – do they have on stock prices?
Why are tech companies cutting jobs in 2023?
Inflation is proving to be a stubborn beast to tame.
From a high of 6.4% in Jan this year, U.S. inflation rates have slowly come down to 4%. While this is a vast improvement, it is still far from the target rate of approximately 2% per year.
Thus, the US Fed has little choice but to keep interest rates high if it hopes to drive inflation down to healthier levels. In turn, this means businesses continue to face funding pressures, which prompt cost-cutting measures to be undertaken.
One of the largest business costs is labour costs, which is why companies frequently turn to layoffs when they need to bring costs down.
For tech companies, the situation is exacerbated by another issue: over-hiring.
You see, during the pandemic, demand for online services like streaming, social media, gaming, online shopping and remote working, etc, blew through the roof, bringing soaring profits to our favourite tech companies.
In response, tech companies went on a hiring spree to cater to increased customer demand and to continue raking in sky-high profits.
However, after pandemic restrictions eased and the balance shifted towards offline and outdoors activities, tech companies were now left with a glut – many simply had too many employees and not enough work to go around.
Nevertheless, it's likely that the tech sector, like many others, will recover with time. If you're looking to invest for the longterm, it is worth learning more on how to build your portfolio sustainably around this sector.
How much do layoffs cost?
Layoffs aren’t exactly cheap. When a company cuts jobs, affected employees aren’t just given an empty cardboard box and told to clear out their desks by 10am or else.
Instead, it is a time-consuming and labour-intensive process, especially when performed at the kind of scale we’ve been seeing. Besides carrying out the layoff, companies also may need to provide career transitioning services such as job matching, counselling, etc.
But by far the largest cost of a layoff is the severance package offered to those retrenched. Typically, companies offer 2 to 4 weeks pay for each year of service, which really starts to add up, especially given the lofty salaries offered by tech companies.
All told, layoffs can cost companies billions of dollars. To wit: Google spent around US$ 2 billion on severance packages earlier this year; Meta expects to spend up to US$ 5 billion on severance and restructuring, and Amazon announced a US$ 640 million price tag on its latest rounds of layoffs.
Clearly, layoffs aren’t something to be taken lightly, especially with the hefty associated costs, which can drag down earnings reports.
How do layoffs affect stock prices?
Which brings us to our next point: how do these mass layoffs with their dramatic numbers actually affect the stock prices of the companies doing them?
On the one hand, the resulting long-term cost savings would allow the company to offer more favourable earnings forecasts for the future. Some investors also see layoffs as a sign that management is willing to trim the fat for the sake of the long haul.
On the other hand, closing down too many positions at once may be read as a sign of trouble, that the company is struggling to bring in enough revenue relative to operating costs, of which labour makes up a significant part.
So are layoffs read as bullish or bearish? Well, neither – or at least when taken on their own.
Analysts studying the topic have found mixed reactions from the market – stock prices can rise, fall, or stay neutral following the announcement of a layoff.
To have a better idea which way stock prices will go, staff layoffs must be read in the context of other key fundamentals. One such metric is whether the company managed to beat earnings estimates, and by how much.
For instance, Google is up by 30% year-to-date at the time of writing, after slashing 12,000 headcount; Amazon is up by 52% year-to-date; and Meta is up by a staggering 129% despite two rounds of layoffs that reduced its workforce by 12%.
All three companies turned in strong balance sheets in their latest earnings reports.
However, that’s not to say that layoff announcements don’t impact stock prices at all. Amazon’s revelation that it was cutting out 9,000 jobs was met with a 1% dip in share price after all.
Hence, investors should allow for the potential of layoff announcements to set off some short-term volatility, which is probably more relevant to day traders than buy-and-hold investors.
But, as seen in Google, Amazon and Meta’s cases, earnings and other fundamentals carry more weight than layoff announcements, especially over the long term.
So the takeaway? Keep your ears open for layoff announcements, but don’t react in panic or euphoria. Always double-check using the fundamentals.
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