Visitors take pictures in front of the Meta sign at its headquarters in Menlo Park, California, December 29, 2022.
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Tech companies are learning an old lesson from Wall Street: maturing means shrinking.
After and Amazon saw their shares soar on Friday after fourth-quarter earnings reports. While revenue for both topped estimates, the story for investors is that they show their ability to do more with less, an enticing equation for shareholders.
There is also a recognition that investors value cash, in many cases, above all else. The tech industry has long preferred to reinvest excess cash into growth, boosting hiring and experimenting with the next big thing. But after a year of heavy layoffs and capital conservation, Meta announced Thursday that, for the first time, it will pay a quarterly dividend of 50 cents per share, while also authorizing an additional $50 billion share buyback plan.
“The key with these companies is really that they’re able to reinvent themselves,” Neuberger Berman analyst Daniel Flax said in an interview on CNBC’s “Squawk Box” on Friday. “They continue to invest for the future and play aggressively while managing expenses in this challenging environment,” he said.
Amazon has been less aggressive about sending cash to shareholders, but the issue is certainly being discussed. The company instituted a $10 billion buyback program in 2022 and hasn’t announced anything since. On Thursday’s earnings call, Morgan Stanley analyst Brian Nowak asked about plans for additional capital returns.
“I’m just really excited to actually have that question,” chief financial officer Brian Olsavsky said in response. “No one has asked me that in three years.”
Olsavsky added that “we discuss and discuss capital structure policies annually or more frequently,” but said the company had nothing to announce. “We are happy to have the best liquidity at the end of 2023 and we will try to continue to build on that,” he said.
After years of seemingly unimpeded growth, the world’s largest Internet companies are steadily entering a new era. They are still looking for the best technical talent, particularly in areas like artificial intelligence, but the growth in the number of employees is measured. Downsizing in some parts of the business likely means downsizing elsewhere.
“I play to win”
For example, the CEO of Meta Mark Zuckerberg told investors that when it comes to artificial intelligence, “we’re playing to win here, and I expect us to continue to invest aggressively in this area to build the most advanced clusters.”
Later in the call, when asked about headcount growth, Zuckerberg said the new hires would be “relatively small compared to what we’ve done historically,” adding that, “I kind of want to keep things lean.”
Olsavsky said that most Amazon teams are “trying to maintain the headcount limit, perhaps going down as we can increase efficiencies in the size of our business.”
The story takes place throughout Silicon Valley. January was the busiest month for tech job cuts since March, according to the website Layoffs.fyi, with nearly 31,000 layoffs at 118 companies. Amazon and Alphabet added to their 2023 job cuts with more layoffs last month as Microsoftwhich cut 1,900 roles in its games unit shortly after the Activision Blizzard acquisition closed.
SAN FRANCISCO, CALIFORNIA – JUNE 23: XBOX CEO Phil Spencer arrives in federal court on June 23, 2023 in San Francisco, California. Top executives from Microsoft and Activision/Blizzard will testify during a five-day hearing against the FTC to determine the fate of a $68.7 billion merger between the two companies. (Photo by Justin Sullivan/Getty Images)
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The decline this week hit the cloud software market, where Okta announced that it was cutting about 400 jobs, or 7% of its staff, and Zoom has confirmed that it has cut less than 2% of its workforce, amounting to almost 150 positions. Zuora announced a plan to cut 8% of jobsor nearly 125 positions based on the most recent headcount figures.
Evan Sohn, president of Recruiter.com, called it a “very confusing job market.” Last year, tech companies responded to dramatically changing market conditions — soaring inflation, rising interest rates, a shift away from risk — after an extended bull market. Meta cut more than 20,000 jobs in 2023, Amazon laid off more than 27,000 people and Alphabet cut more than 12,000 jobs.
The economy is in a very different place today. Growth is returning at a healthy clip, inflation appears under control and the Federal Reserve is indicating interest rate cuts are on the horizon this year. Unemployment held at 3.7% in January, down from 6.4% three years earlier, when the economy was just opening up from pandemic lockdowns. And non-agricultural payrolls rose by 353,000 last month, the Labor Department’s Bureau of Labor Statistics reported Friday.
Tech stocks are booming, with Meta, Alphabet and Microsoft at or near record levels.
But the contraction in the industry continues.
“Companies are still in liquidation from ’23,” Sohn told CNBC’s “Worldwide Exchange” this week. “There could be a shift in skills, different skills needed to really handle the new world of 2024.”
Wall Street is rewarding tech companies for improved discipline and cash distribution, but raising the question of where they can turn for significant growth. Other than Nvidiawhich had a banner year in 2023 due to growing demand for its AI chips, none of the other large-cap tech companies are growing at historical averages.
Even Meta’s better-than-expected 25% growth for the fourth quarter is a bit misleading because the comparable year-ago number was down due to a slowdown in the digital ad market and of Apple iOS update, which made targeting ads more difficult. Chief financial officer Susan Li reminded analysts on Thursday that as it moves into 2024, the company will “experience periods of increasingly strong demand.”
By the end of this year, analysts predict that growth in the Meta will return to the low-teens at best. Growth estimates for Amazon and Alphabet are even lower, a good sign that calls for capital allocation measures may be getting louder.
Ben Barringer, technology analyst at Quilter Cheviot, told CNBC that Meta’s decision to pay a dividend was a “symbolic moment” in that regard.
“Mark Zuckerberg is showing that he wants to bring shareholders with him and is emphasizing that Meta is now a mature, grown business,” Barringer said.
— CNBC’s Annie Palmer contributed to this report
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