Technology

Wall Street ignored the bloat of Big Tech during boom times. Now it’s ready to slice and dice.

It’s been a rough fall for tech, with Meta, Twitter, and Amazon undergoing widespread layoffs.

More than 120,000 tech workers were laid off in 2022, according to the layoffs tracker. As budget season continues, that number is likely to rise further before the end of the year.

One reason for the layoffs: Wall Street has an increasing say in how tech giants are run.

For much of the 2000s, big tech companies could operate largely without Wall Street shareholders complaining about inflated salaries or skyrocketing profits, thanks to revenues that grew reliably at a double rate year after year. There have been some investors like Benchmark’s Bill Gurley who have criticized bloated tech spending, but voices like Gurley have been the exception rather than the rule.

But a slump in tech stocks in 2022 and dismal revenue forecasts mean Wall Street suddenly has clout. Go against Wall Street, as Mark Zuckerberg has done repeatedly this year by doubling down on reverse spending, and your stock price plummets as institutional investors backtrack.

Take Fidelity, for example, the third largest owner of Meta. In 2022, as Meta’s stock is down 66% year-over-year and Fidelity’s position has lost $27 billion in market value, it has flooded the market with 13 million shares, or about 10% of its position, much to the pain of Meta and its other investors (and no Doubt motivates others to sell).

This emboldened activist investors to say what many on Wall Street think: It’s time for big tech, employed rapidly during the pandemic, to downsize.

Bad secret in Silicon Valley.

In late October, hedge fund Altimeter Capital sent an open letter to Mark Zuckerberg and Meta. Fund manager Brad Gerstner called on Meta to cut staff spending by 20% and limit spending on Metaverse projects and capital expenditures.

While his recommendations focused on the Meta, Gerstner focused on the tech sector as a whole.

“Like so many other companies in the zero-rate world — Meta has drifted into the land of excess — too many people, too many ideas, too little urgency,” Gerstner wrote.

“It’s a bad secret in Silicon Valley that companies ranging from Google to Meta to Twitter to Uber can generate similar levels of revenue with far fewer people,” he continued.

Two weeks later, Meta announced that it would lay off 11,000 workers, reducing its headcount by 13%.

On Tuesday, TCI Capital’s Chris Hone sent a letter to Alphabet CEO Sundar Pichai, warning him that the company has too many workers, pays them too much, and wastes money on bad bets. Notably, Hoon quoted Gerstner with approval about Silicon Valley’s notoriously bad secret.

On Wednesday, analyst Mark Schmulek at Bernstein wrote to clients that Google will need to lay off workers, as natural attrition rates will slow as the market for technology jobs slows. “If you have a job at Google, you rack your head and hope that cutting toro from a sushi bar is the only thing that affects you,” Schmulek writes.

On Thursday, news broke that Alphabet would step up its performance review system, with managers now required to identify the 6% of Alphabet’s employees, about 10,000 people, as low performers. In previous years, managers were expected to rate only 2% of their reports as underperforming.

In the background, activist investor Starboard, known for its powerful presentations on why companies like The Olive Garden need to cut costs and improve products, has been quietly buying up stakes in companies like Salesforce, as well as smaller tech operators.

For activist investors, the dual stock structure of newer tech giants, where the founders own “super equity” that allows them to easily maintain control of the company, will always be a stumbling block to the traditional role of buying enough stock to get a board seat. But it can serve as a voice for what big investors think but don’t want to say, and still spur management into action.

The more open question is whether tech companies are really bloated in terms of headcount. Twitter is a test of whether a company can lose 50% of its employees and still be in business, but since it’s privately owned by Elon Musk, it’s going to be hard to know the impact on Twitter’s bottom line.

But until revenue growth returns to the tech sector, companies like Meta, Amazon, and Alphabet can’t assume that investors will come for the ride. Wall Street will want to see companies cut costs, which means more layoffs. If the tech sector goes into a recession — several quarters of declining revenue — the pain is likely just beginning.

This means we may soon have a large-scale, investor-spurred experiment of whether big tech can generate the same revenue with far fewer people.

Smith

Tricare west is a global news publication that tells the stories you want to know.

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