Technology giants lay off en masse despite profits – 02/13/2024 – Market

They dictate the rhythm of the United States stock markets and are extremely valued on Wall Street.

Technology companies known as the “Magnificent Seven” continue to grow in sales, profits and value.

According to analysts, they will all sell 12% more this year and another 12% in 2025. Far above similar companies in other industries.

Alphabet (Google’s parent company), Apple, Amazon, Meta and Microsoft together earned around US$327 billion (R$1.6 trillion) in 2023, 25.6% more than in the previous year. A number close, for example, to the total GDP of Colombia or Chile.

And yet this exclusive group, to which Tesla and Nvidia also belong, is going through a phase of layoffs, in some cases massive, and which are in addition to those carried out last year.

After a first reduction in its workforce in July 2023, Microsoft laid off again in 2024, cutting 1,900 employees after closing a deal to purchase Activision Blizzard for US$69 billion.

The same happens with Amazon, which will eliminate 35% of the Twitch platform’s workforce and another hundred Amazon Prime employees after cutting 9,000 people last year.

In addition to the giants, many other smaller companies have joined the wave. In total, almost 32,000 workers have been laid off from 122 technology companies since the beginning of the year, according to the website Layoff.fyi, cited by Reuters. And there are still more than 10 months to go.

Paypal will have 2,500 fewer employees this year, Spotify 1,500, eBay 1,000 and Snapchat 500 – to give examples of well-known companies in the technology industry.

This scenario has led many to compare what is happening to the early 2000s, when the rise of the internet led to the dot-com bubble, or the speculative frenzy and subsequent drop in the stock prices of many internet-based companies during the late 2000s. 1990s and early 2000s.

For Mathieu Racheter, chief analyst at consultancy Julius Baer, ​​the comparison is not sustainable because the value of shares of megacapitalization technology companies has not yet reached the bubble level of the leaders of the 2000s.

Baer adds that the “Magnificent Seven” generates a lot of money, which would help in case of any potential problems.

But what, then, is behind this second wave of cuts?

1. Artificial intelligence and strategic changes

“The history of the technology sector includes the rise and fall of large companies that end up being affected by disruption and being replaced by more innovative ones from the next generation”, recalls Brice Prunas, Artificial Intelligence manager at asset management company ODDO BHF AM .

That’s what happened with the dot-com bubble. And, in this decade, the boom in Artificial Intelligence (AI) models represents a revolution.

“Take the language learning company Duolingo as an example. Some of its laid-off staff (or “disconnected” to use the term used by the company) are writers and translators, who will be replaced by algorithms”, explains the Quarck website.

The AI ​​is fast. What takes a human writer 60 to 90 minutes to write, AI can do in 10 minutes or less.

Earlier this year, a Goldman Sachs report said AI could replace the equivalent of 300 million full-time jobs.

“We already saw this in the technology bubble of the 2000s, disruptions always lead companies to relocate within their structure,” says Javier Molina, senior markets analyst at eToro.

“On the one hand, we see strategic changes and closure of divisions and, on the other, a reorientation towards Artificial Intelligence. This leads to the elimination of certain jobs in many processes that are automatic”, says Molina.

It’s the way to increase productivity.

2. The memory of 2022 and the closure of projects

The technology sector shed 168,032 jobs in 2023 and was responsible for the highest number of layoffs across all industries, according to a report from consultancy Challenger, Gray & Christmas, Inc.

Amid the wave of euphoria over the success they achieved during the pandemic, many Silicon Valley companies increased hiring and expanded their growth plans with the idea that the wind would continue to blow in their favor.

But that’s not how it happened, and when the winds changed, mass layoffs began in 2022, which continued through much of 2023.

Another reason that conspired against the new projects was the increase in interest rates by the Federal Reserve, the American Central Bank, in response to uncontrolled inflation.

Borrowing money is now more expensive and many technology companies require a lot of capital, especially in the early stages of development.

“The recent increases in interest rates have accentuated the limit situation of many projects, which in other times could invest, aspiring to grow and achieve profits at a later stage”, says Andrés Allende, manager of the DIP Value Catalyst fund at A&G funds.

“However, now, the domino effect of more expensive financing has dried up investments. This leads to the closure of more and more technological projects”, he adds.

With the cuts, companies seek to be as healthy as possible in a time of economic uncertainty.

“Below the ‘mega-caps’ (megacapitalization companies), many smaller companies are going through very difficult times, which explains the reductions in headcount,” says Prunas, from ODDO.

3. A brutal cycle

And even mega-caps have resorted to cost-cutting to satiate their investors’ demand for higher profits.

But “technology cycles tend to be like this, abrupt… but also faster and more flexible. Soon, many of these companies and projects will adapt and innovate again. Those that survive may once again have very promising opportunities”, explains Allende.

“Until the new cycle comes to life – we are already starting to see some signs – the difficulties in the technology sector could significantly impact consumption and investment in other sectors, as tech jobs often have income levels well above average”, adds the A&G specialist.

Analysts agree that it is necessary to differentiate what happens in small companies, which is a matter of survival, from what happens with technology giants, which have more margin and large amounts of capital to face turbulence.