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Opinion: Amid layoffs and slowing growth, when will the tech sector rebound?

Markets have rewarded recent layoff announcements from prominent tech firms such as Meta and Microsoft, but does that mean the sector has bottomed out?
Opinion: Amid layoffs and slowing growth, when will the tech sector rebound?

You don’t have to be a social media buff to know that the recent Twitter layoffs have dominated the news cycle the past week.

On October 28, billionaire Elon Musk closed on his $44 billion deal to buy Twitter. By Tuesday (November 8), TWTR would have been taken off the New York Stock Exchange, and shareholders paid $54.20 per share.

In the week since his deal closed, he’s brought a kitchen sink into the headquarters, turned out its board, and most sensationally, fired half its workforce via email – then tried to hire some of them back.

BIGGER TREND

But Twitter isn’t the only tech firm to have announced layoffs or hiring freezes (although it is the most drastic). Amazon and Alphabet have announced a pause on hiring, with the latter hinting at possible layoffs.

Ridehailing app Lyft will lay off 13% of its staff, and Microsoft confirmed in October that it had let go of workers on the back of slowing revenue. On Monday (November 7), the Wall Street Journal revealed that thousands would be affected by layoffs at Meta.

Amid a tech bear market that has seen the Dow Jones US Tech Index post a negative 36.10% year-to-date return, investors have responded positively to these layoffs.

Meta shares, which lost 71.43% this year so far, saw a 6.51% uptick on Monday (November 7), after news broke that the company planned to lay off thousands of people this week.

When Microsoft announced its layoffs, its share price rose from $237.53 on October 17 to $250.66 on October 25.

“Publicly listed technology companies… are cutting back on vanity projects and the excessive hiring of recent years,” Richard Clode, portfolio manager at Janus Henderson Investors told AsianInvestor.

“Seasoned CFOs like Amy Hood at Microsoft and Ruth Porat at Alphabet are invoking their muscle memory from prior recessions and are cutting costs. Right-sizing the cost base for a tougher outlook and a recession is prudent and welcomed by investors,” he said.

“You can see the negative market reaction of Meta to a lack of cost and capex control last week, and then the market welcoming reports of headcount cuts this week.”

PREMATURE POSITIVITY?

The markets also reacted positively to Musk’s takeover of Twitter, although it is unclear if investors knew that such drastic cuts were coming. Twitter’s share price rose in the first half of the year when Musk made his bid to buy the entire business, and plunged for a brief moment in July when he seemed to have changed his mind.

Year-to-date, the tech firm’s share price rose 11.80%, well above the tech indices, which are seeing negative returns well into the 30s.

For all the talk about stakeholder value and being environmental, social and governance (ESG)-integrated, one can’t help but wonder if Twitter would have had such massive cuts in such a short time frame if it were to remain a listed company.

And if it did, would investors have reacted so positively? Private investors have argued that the private markets are better for ESG because founders are able to build in ESG practices more easily.

But perhaps they were talking about the environment and had forgotten about the ‘s’ – just as Musk seems to have.

PRIVATE PRESSURE

Private companies have not been spared from cost cuts either as valuations collapse. Payment processing firm Stripe said it would cut 1,100 jobs, or 14% of its workforce, for instance, as it lowered its internal valuation by 28% to $74 billion.

“While public market valuations adjusted rapidly, that has not been the case on the private side where the valuation reset only coincides with running out of cash. Klarna is a good example of that,” said Clode, referring to the ‘buy now, pay later’ company whose Australian arm was shown to have a net asset deficiency of more than A$70 million ($45.4 million) in 2021 during an audit.

“For publicly listed technology companies, the positive is they no longer face irrational competition from these companies funded by billion-dollar cheques from SoftBank.”

FED-INFLUENCED FUTURE

It remains to be seen how long this bear market will last, and investors remain positive about the tech sector in general. Few foresee a rebound as we enter the close of the year, especially as Fed rates continue to rise and geopolitics cast a shadow on an already uncertain future.

“Valuations and consensus earnings estimates have seen a material reset, the latter only more recently, but combined with this cost-cutting that makes consensus estimates more reasonable for 2023,” Clode said.

“A lot of that wood has now been chopped, setting up for a potential rebound next year. As well as the above, we would need to see the Fed pivot or at least give the market confidence in what peak rates will be so we can set valuations appropriately. That will give investors confidence to return to growth stocks. We also need geopolitics to stabilise and China to emerge from zero-Covid.

Apple shares fell 2% on Monday after the company said there would be delays in iPhone 14 shipments as workers walked out of a Zhengzhou factory in north-central China amid a Covid outbreak.

“It is always difficult to try to call a time to a market top or bottom, what we can do as a fundamental manager is to assess the factors one would likely need to see for a durable recovery,” Rahul Ghosh, portfolio specialist in the equity division at T Rowe Price told AsianInvestor.

“Currently, we believe the market continues to balance inflation and the Federal Reserve’s recent actions to raise rates, and growth sectors such as technology continue to derate to reflect the increased cost of capital impacting longer duration assets.”

“We think that we would need to see some stability in market expectations around the level of inflation and terminal rates for fundamentals to once again lead in driving performance,” he added.

¬ Haymarket Media Limited. All rights reserved.
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