Tuesday's Market Minute: New Year, New Realities for Tech Giants as Layoffs Persist

Tuesday's Market Minute: New Year, New Realities for Tech Giants as Layoffs Persist

High rates are painful in all aspects of the market – but this pain is being reflected most fiercely in layoffs spanning across Silicon Valley. Two years ago, when the pandemic boomed and lockdowns followed, office communication tools, hardware, software, and the cloud companies witnessed unprecedented demand, with cheap money translating into huge growth.

Today, in a more normalized world, record-low interest rates are gone, and money is simply more expensive. There are also few signs of this easing in the near-term, with the market expecting two more rate hikes this year to at least 5%. 

With these extreme valuations pulling back, less cash flowing, and consequently market shares dwindling, major tech companies are reacting by trimming their workforces. Amazon AMZN – which has spared no expense on the quest for aggressive growth – has even shifted its tune. The tech and e-commerce behemoth has begun laying off 18,000 jobs and re-thinking its operations with less profitability.

Salesforce CRM, at its pandemic peak, bought Slack for $28B, borrowing roughly $10B for the deal. This month, the cloud company announced trimming 10% of its near-80,000 workforce and closing select offices after the pandemic surge left it with a bloated workforce and debt on the table.

Spotify (SPOT) was the latest layoff headline on Monday, with plans to cut 6% of its workforce, or about 600 jobs. The streaming company first disclosed in October it was slowing hiring for the remainder of 2022 and into 2023. But the company’s CEO Daniel Ek acknowledged that despite their efforts to rein in costs, it has not been enough.

Just last week, Alphabet GOOGL disclosed reducing its workforce by about 12,000 roles or 6% of its total workforce – its largest round of layoffs ever. Microsoft (MSFT) also echoed similar plans last week, laying off about 4.5% of its 221,000 total employees. This is the company’s second round of layoffs since the fall, when it shed as many as 1,000 jobs.

Now, the next hurdle for these mega-cap tech names is earnings. More clarity on cost-cutting efforts, restructuring, and guidance into 2023 will be welcomed by the Street. First up will be Microsoft, reporting its second quarter financials Tuesday after the close.

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