Despite turning over the calendar year, many of 2022's problems and trends will continue to persist throughout 2023.
While the Fed and inflation top the list, many other narratives will continue and, likely, intensify this year.
Among those are the ongoing tech layoffs.
Layoff Trend
Headed into the new year, there was a strong trend of layoffs in the tech sector as hiring freezes staff reductions were increasingly common throughout the past year.
As of now, the list of layoffs is extensive (and not comprehensive), and while not limited to tech, it is certainly dominated by it.
Now, tech is essentially an umbrella term at this point given that solar energy, software, hardware, communication equipment, semiconductors, and electronics all fall into this sector. This sector doesn't technically exclude internet retail companies, however, the likes of Amazon continue to get grouped in with tech companies so for this article, tech is Amazon-included.
So we’ll narrower it down further: dominating the list are companies that flew too close to the sun during the WFH pandemic reality. Including SaaS, gig economy, social media, internet retail, WFH, telehealth, tech-device companies, and more.
The most recent additions to the list are Amazon, which announced it is laying off more than 18,000 employees on Thursday, and Salesforce, which said it will lay off 10% of its workforce on Wednesday.
What to Expect
Layoffs are interesting from the stock price perspective as it's not cut and dried if they are good or bad for the stock’s price.
There are many factors that can decide how bullishly or bearishly investors receive the news. Among many other things, this can include: the company’s brand, the portion of the company being laid off, layoff frequency (like, if its the first layoff since 2003), and even what parts the layoffs are coming from (such as Tesla laying off Autopilot data labelers).
Stocks tend to get an initial boost following layoffs. When you consider what state the company and/or economy tend to be leading to layoffs, freeing up cash is likely necessary to some degree. Thus, the stock oftentimes goes higher.
That's great for the day trader, but companies that announce layoffs tend to underperform over the long run compared to peers that didn’t. According to a published paper by the Strategic Management Journal, American firms average a 1.75% decline following layoffs.
Things to Come
In addition to layoffs, there are a lot of headlines to come in 2023 for tech companies, including many about the price of services.
Leading into the pandemic, there were a lot of on-the-cusp tech companies that were nearing profitability but were really just scaling machines at the time. Uber is a brilliant example of this.
They were unprofitable for a very long time, with the company always saying that they would reach profitability “at scale”. They and others went into the pandemic at a crucial pivot where investors were starting to expect profitability to come in the here and now. Once that happened, it was only a matter of time before prices for the service soared as ROI became more important than net new riders, or whatever user-based metric investors watched.
The hikes started in 2019 for Uber, with the average cost of a ride rising 92% through 2021 and 45% between 2019 and 2022. Given that the company is still not consistently profitable, more hikes could be on the way as the over-scaled company attempts to get it's unit economics on track.
Subscription prices have been on the rise throughout 2022, and there could be more to come with both a clampdown on subscription sharing and further price increases. While the likes of Netflix and other streaming services come to mind, this includes subscriptions like Amazon’s Prime, which saw its price rise in 2022.
You’ve heard of shrinkflation? Where the amount of air in chip bags increases to disguise that inflation has people paying more for less. Well, the streaming services version of that is the addition of with-ad subscription options that replace the previously ad-free service, which is now a tier up and costs more.
Lastly, while there is more pain ahead for the tech workforce, consumers may find more discounted tech items - excluding Apple’s version of said device, of course. For companies that offer both SaaS and tech products, discounted devices could precede raised subscription costs as companies try to mitigate hits to profitability.
Wrapping Up
The battered tech space has more pain ahead with both layoffs and price hikes poised to continue.
While stocks tend to rise in the short-term following layoffs, the long-term returns tend to underperform peers that didn’t lay employees off. Further, a lot of variables are at play for whether the stock ever rises on the headline, including the size of layoff and industry trends.
With layoffs continuing, pressure on tech stocks remains high as for some, it's now or never to prove that pricing low in order to scale quickly was the right strategy. This suggests more price hikes ahead, especially for newer services.
However, given the poor economic environment, purchases of PCs and other expensive tech products are waning which will force companies to offer more sales on the latest tech, which could in turn add new inflationary pressure to the price of software services.
