(Bloomberg) -- Tens of thousands of tech sector job cuts may not be enough to reverse the collapse in share prices, given the looming economic downturn could slash companies’ revenues far more than the cost savings they make via layoffs.
Amazon.com Inc (NASDAQ:AMZN) last week announced more than 18,000 job cuts, the biggest reduction in its history, while Salesforce (NYSE:CRM) said it would cut about 10% of its workforce, adding to the toll in a sector that has been scrabbling for months to retrench. Industry tracker Layoffs.fyi estimates 18,300 employees have been let go this year, following the loss of 154,000 jobs in 2022.
Investors have applauded the cuts on the expectation that they will help protect margins; Salesforce, for instance, has rallied since its announcement, while shares in Facebook owner Meta Platforms Inc (NASDAQ:META) have rebounded 34% since it announced it would cull more than 11,000 jobs.
Yet in an industry that hired prolifically during its pandemic boom years, the cuts may be too little, too late, analysts say. For many, share prices do not yet reflect how much of a hit profits will take as demand for tech cools in a slowing economy.
“Layoffs should be a move of last resort, so it can’t be good circumstances if you’re getting rid of 10,000 people,” said Ashwin Alankar, head of global asset allocation at Janus Henderson Investors. “It tells me demand is much worse than the market expects, which suggests multiples need to contract more.”
Tech shares could see an additional 20% downside in a worst-case scenario, he said, following last year’s 33% drop in the Nasdaq 100 index, its worst performance since 2008.
“The market is focusing on what companies can grow in this environment, so if the layoffs portend something more than a cutting of Covid fat, then estimates still look too high and valuations still look expensive,” he added.
Analysts have already slashed revenue growth estimates for tech companies to 2.4% for 2023, versus a consensus projection of 5.4% just three months ago, according to Bloomberg Intelligence. The collapse in earnings expectations is even starker; they are now seen falling 2.2% this year, compared with the prior projection of 4.3% growth.
Many investors see the cuts as a positive trend, at least from an investment perspective, given they have helped lift the tech-heavy Nasdaq 100 index almost 3% since November.
“This tells you that companies are being realistic, and that they have real concerns for profitability and their shareholders,” Tony DeSpirito, chief investment officer of U.S. fundamental active equity at Blackrock Financial Management, said in a phone interview. “That’s a good thing, because at the end of the day, they need to show and grow their profits. Sometimes that involves making tough decisions.”
But the cuts will not be enough, reckons Mike Wilson, chief US equity strategist at Morgan Stanley.
“(Tech firms) are not good at cost cutting and they will be late on that,” Wilson told Bloomberg Television’s Surveillance. “It will take longer than you think, and the margin degradation can be more severe in those areas.”
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