A wave of layoffs and hiring freezes in Silicon Valley amid a sluggish economy reflect “recognition of a new reality” by big tech companies, investment bank Jefferies said in a research note published Wednesday.
“The new reality is that demand is fading,” Brent Till, lead analyst for the report, told Fortune. “And hiring is so fast that if we do go into a recession, it’s inevitable that we’ll have more layoffs.”
Analysts cited TrueUp data that some 210,000 tech workers were laid off this year, with up to 40% of those laid off in the fourth quarter. Jefferies analysis showed that there are now, on average, 36% fewer Internet and software companies than at the beginning of the year. Till said it was a signal of “overkill” caused by technology in a “time of easy money”.
Among tech giants, Meta announced plans to cut 11,000 jobs – a 13 percent cut. Amazon has reportedly begun layoffs of a similar magnitude, though it’s unclear how much the company will eventually grow. Meanwhile, Microsoft has announced two rounds of layoffs this year, most recently in October with 1,000 job cuts.
Google is the only major tech company that hasn’t announced layoffs, Jeffreys noted, though he noted that it had imposed a hiring moratorium earlier this year.
“You see strong evidence that large, medium and small companies are in a period of rationalization of what is happening,” Till said, adding that “there is no demand and their price pressure is out of the norm.” Comparing the Big Three’s headcount with their declining earnings illustrates the inconsistency and the need for rationalization.
The headcount reduction is due to over-recruitment during the pandemic, which analysts said was necessary to “recover operational efficiency with headcount in line with current demand trends.”
“If your per capita income is falling because you have no income, then you will be cutting headcount,” Till said.
Amazon and Meta posted the worst results in the third quarter of this year, a big departure from their pandemic-era success.
“I think that’s what really separates the real athletes from the amateurs,” he said, recalling Warren Buffett’s famous “swim naked” adage about how a market crash can reveal a lot. However, Till said there will be more layoffs and he doesn’t know how much that number will be, but it will be much higher.
“If you’re tech-savvy, buckle up – it’s going to be a tough ride,” he said. “And you better make sure you show up at the top of the performance page, because they’re watching, and this isn’t the first wave of cuts.”
Jeffreys’ inside view is that the economy will slide into recession in the third quarter of next year. So even before a recession hits, Till says, “tech companies are notoriously over-optimistic.”
“We’re not trying to be dramatic,” he said. “We are not trying to attract attention. We’re just trying to be realistic that these companies need to adjust their cost structures because during an economic downturn, if they can’t control earnings, they can only control one thing. And these are expenses. … Technology spends the most money. These are people.”
This “new reality” in the tech industry is still a natural part of a recession, Till said, and technology isn’t “insured” either.
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Post time: Dec-08-2022