Last year, the S&P 500 hit record highs as the Nasdaq clocked its strongest performance in two years. But the strong market performance may be hiding a different story unfolding in the tech world.
Despite soaring stock prices and market caps reaching unprecedented levels, tech giants are making drastic moves to streamline their operations, particularly by shedding employees. A wave of layoffs is sweeping through the technology industry, signalling a significant shift in strategy for tech companies, including Big Tech mega-caps.
As Wall Street celebrates the success of Silicon Valley, the following tech companies are choosing to prioritize efficiency and profitability, at the expense of their workforce, a trend exemplified by recent jobs cut announcements from these industry giants, among several others.
Google-parent Alphabet GOOG is a tech behemoth that generates 99% of revenue from its search engine. Online ads contribute 85% of that revenue while sales of apps and content on Google Play and YouTube, as well as cloud service fees, comprise the rest.
The firm also generates some revenue from sales of hardware such as Chromebooks, the Pixel smartphone, and smart home products.
Google recently laid off hundreds of workers, following its Silicon Valley rivals, to reduce its employee count in the hardware and internal software tools segments. These job cuts come on the heels of several rounds of layoffs at the company, including a massive reduction of 12,000 positions in anticipation of an impending recession.
Yet, Alphabet ended the fourth quarter with a beat on sales and earnings, as many segments registered strong growth. “Alphabet dominates the online search market with a 90%-plus global share for Google, and the business generates very strong cash flow,” says a Morningstar equity report, stressing that Google will maintain its leadership “despite Microsoft moving first to include generative artificial intelligence in Bing search.”
Google has built a robust ecosystem around its products attracting more users. This makes its online advertising services more attractive to advertisers and publishers, “resulting in increased online ad revenue,” says Morningstar equity analyst Ali Mogharabi, who forecasts ad revenue to continue to grow at high-single-digit rates over the next five years.
The wide-moat firm’s sustainable competitive advantage is built on its intangible assets and the network effect, says Mogharabi, who puts the stock’s fair value at US$171, implying a five-year compound annual revenue growth rate of over 10% and a five-year average operating margin of nearly 29%.
Facebook-parent Meta META is the world’s largest online social network. It boasts a staggering 3.8 billion active monthly users who exchange messages and share news events, photos, and videos via its ecosystem. Meta’s product portfolio comprises highly popular social media platforms including Facebook, Instagram, Messenger and WhatsApp.
More than 90% of the firm’s total revenue comes form advertising, of which over 45% coming from the U.S. and Canada and over 20% from Europe.
In November, the company announced 11,000 job cuts with another 10,000 layoffs planned for this year, thereby reducing its entire workforce by 25%. Meta CEO Mark Zuckerberg’s called 2023 the “year of efficiency,” during which the company slashed 20,000 jobs.
Meta recently saw its fourth-quarter profit triple and announced its first-ever dividend. The growth in users and user engagement, along with the valuable data they generate, makes Meta’s social platforms appealing to advertisers. “The combination of these valuable assets and our expectation that advertisers will continue shift their spending online bodes well for the firm’s top-line growth and cash flow,” says a Morningstar equity report, adding that Meta’s “large audience size will still attract ad dollars.”
The firm’s Facebook, Instagram and WhatsApp platforms are among the world’s most widely used apps, which the company is pushing to further monetize by “applying artificial intelligence and virtual and augmented reality technologies, to further generate attractive revenue growth from advertisers,” says Mogharabi, who puts the stock’s fair value at US$322, and projects 10% average annual growth over the next five years.
Tech behemoth Microsoft MSFT makes consumer and enterprise software and is best known for its Windows operating systems and Office productivity suite. The company operates three segments: productivity and business processes (legacy Microsoft Office, cloud-based Office 365, Skype, LinkedIn), intelligence cloud (Azure, Windows Server OS), personal computing (Windows Client, Xbox, Bing search), and Surface laptops, tablets, and desktops.
Microsoft recently slashed 1,900 jobs with an aim to reduce "areas of overlap" following the tech giant's acquisition of Activision Blizzard. Microsoft reportedly plans to eliminate about 11,000 jobs, or about 5% of its workforce, in response to a deteriorating global economic outlook.
The tech major is one of two public cloud providers, boasts great success in upselling users on higher priced Office 365 versions, and has emerged as a leader in AI recently. “These factors have combined to drive a more focused company that offers impressive revenue growth with high and expanding margins,” says a Morningstar equity report.
Microsoft’s cloud platform Azure is the centerpiece of the company. It is already an approximately US$58-billion business, having grown at an impressive 30% rate in 2023.
The firm’s wide moat stems from switching costs, network effects, and cost advantages. “[Microsoft] is a leader across a variety of key technology areas, which should result in economic returns well in excess of its cost of capital for years to come,” notes Morningstar equity analyst, Dan Romanoff, who puts the stock’s fair value at US$420.
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