Technology stocks led the market in the past month, with the Technology Select Sector SPDR Fund (NYSEARCA: XLK) advancing 14.75%, versus the SPDR S&P 500 ETF Trust (NYSEARCA: SPY)’s return of 10.52%.
But behind the scenes, there’s more than just strong price advances. Big techs such as Microsoft Corp. (NASDAQ: MSFT) are cutting costs to boost margins and profitability.
That’s also true of other companies typically considered techs, which are part of other sectors.
Despite its large presence as a cloud provider, Amazon.com Inc. (NASDAQ: AMZN) is tracked with consumer discretionary stocks in the Consumer Discretionary Select Sector SPDR Fund (NYSEARCA: XLY).
Alphabet Inc. (NASDAQ: GOOGL) and Meta Platforms Inc. (NASDAQ: META) are components within the Communication Services Select Sector SPDR Fund (NYSEARCA: XLC).
Slashing costs means laying off
Amazon, Alphabet and Meta are also among companies slashing expenses, ]a euphemism for laying off workers to contain costs.
These companies aren’t laying off thousands of employees as in late 2022 and early 2023. Instead, companies are taking a hard look at remaining excess after ramping up rapidly during the pandemic with little regard for what would happen in an economic contraction.
In addition, higher interest rates have put a new twist on growth. Tech companies felt the impact of higher rates in 2022; some downsizing is in response.
Techs are especially sensitive to higher interest rates as they rely on borrowed capital for expansion. Higher rates mean higher borrowing costs, which impacts profit margins and puts a damper on growth potential.
Techs have been raising their spending on AI, the area that’s driven growth this year.
In mid-November, Wedbush tech analyst Dan Ives wrote, “We view AI as the most transformative technology trend since the start of the internet in 1995 and believe many on the Street are underestimating the $1 trillion of AI spend set to happen over the next decade in a bonanza for the chip and software sectors.”
Shifting workers to AI projects
Where possible, techs are reassigning workers to AI-related projects, according to reports.
But that’s not always possible.
According to the Wall Street Journal, Amazon slashed jobs from its Alexa unit, intending to redeploy resources to generative AI efforts. Amazon has reportedly cut jobs from its music and gaming units.
At Meta Platforms, CEO Mark Zuckerberg famously declared 2023 a “year of efficiency” after a disastrous 2022 in which the stock tanked to the tune of 64%, while earnings and revenue declined.
Meta laid off more than 21,000 employees in 2023 but said it expects to start adding jobs next year.
A net gain in employment doesn’t mean there won’t be more job cuts, and more layoffs may be on the horizon. With the holiday season approaching, companies may not want the bad press of being Scrooge, meaning pink slips may occur in January.
Hitting the brakes on self-driving units
Alphabet has been slashing jobs and reallocating human resources to AI projects. It’s also been cutting teams working on projects that aren’t showing the same immediate potential as AI.
For example, Alphabet has been cutting back on its self-driving car business, Waymo. Self-driving cars, once heralded as the next big thing, are taking a backseat as companies put the pedal to the metal on AI.
General Motors Co. (NYSE: GM) cut spending on its Cruise automated vehicle units after accidents showing the technology isn’t ready for large-scale rollouts.
In Alphabet’s case, the company says it’s offering employees whose business units are being downsized the opportunity to apply for jobs elsewhere in the company. Employees laid off last year didn't have that opportunity.
Lofty cloud business, but LinkedIn layoffs
Meanwhile, Microsoft, which has been shelling out billions to build out its AI capabilities, has been riding high on growth of its cloud-computing business, pegged to AI growth. But in yet another case of shuffling corporate resources around, Microsoft laid off about 700 workers from its LinkedIn unit in October.
However, LinkedIn India is reportedly hiring.
Microsoft laid off more than 11,000 workers in January, with another round in July.