Big Layoffs From Big Tech: What Does it Mean for Investors?

Mega-sized tech companies have shed 70,000 employees in the past year as a harsh reminder that you can’t grow forever. These companies are now seeing their first round of significant job rationalization since they went public.

Ultra-low interest rates since 2008 had propped up incredibly frothy market conditions that saw the valuation of companies such as Alphabet (NASDAQ:GOOGL) (Google), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Meta and others balloon to astronomical heights.

CNBC reports that layoffs have been commonplace across the public tech space, with notable layoffs coming from companies such as:

• Amazon: 18,000 jobs cut
• Alphabet: 12,000 jobs cut
• Meta: 11,000 jobs cut
• Microsoft: 10,000 jobs cut
• Salesforce: 7,000 jobs cut
• Twitter: 3,700 jobs cut
• Shopify (TSX:SHOP): 1,000 jobs cut

Why is this happening in Big Tech?

Pre-2022, these large tech companies benefitted from significant revenue growth, and their investors rewarded them for it as their share prices skyrocketed in many cases. As the economy entered an uncertain environment throughout 2022, it became increasingly more likely that revenue growth would significantly slow down in the sector.

When revenue is expanding and capital is flowing, companies generally feel very comfortable increasing the headcount of their workforce to pursue new projects and continue to support revenue growth. As evidence for this, from 2018 to 2022, Microsoft increased tech employees by 53%, Meta by 92%, Apple (NASDAQ:AAPL) by 20% and Alphabet by 60% over the same period.

Now that revenue growth is uncertain, these companies have had to reduce their headcount in anticipation of weak demand.

What does this mean for the tech industry?

While these job cuts are clearly very unfortunate, the outlook for the tech industry still remains in fairly good shape. So, although the headline numbers seem large, it’s important to keep in mind that these big tech companies employ tens of thousands of workers, and the relative percentage of jobs cut is still quite low (e.g., Amazon laid off only 1.2% of its entire workforce).

This round of job cuts likely represents a new phase for the sector, which may not be an entirely bad thing. As mentioned earlier, these companies had historically focused on revenue growth and revenue growth only—and they were handsomely rewarded for it.

Now, the companies must focus more on running their businesses efficiently which may end up bringing better products and services to their consumers and continued returns for investors.

ETFs with exposure to big tech

Following a sell-off in 2022, for long-term investors, the current juncture represents an opportunity to build up a position at a more reasonable valuation level. While it can’t be guaranteed that the big tech companies won’t continue to remain weak, the job cuts were a step in the right direction in regard to the evolution of the industry.

The following ETFs have outsized big tech exposure which investors may wish to consider:

Invesco QQQ ETF (QQQ)

• AUM: $161 billion
• 1mo Performance: +12.2%
• 1mo Flows: -$1.5 billion

Vanguard Information Technology ETF (VGT)

• AUM: $44 billion
• 1mo Performance: +13.1%
• 1mo Flows: -$1.1 billion

iShares U.S. Technology ETF (IYW)

• AUM: $9 billion
• 1mo Performance: +15.5%
• 1mo Flows: +$73 million

Data as of February 10, 2023.

This content was originally published by our partners at ETF Central.