The pandemic is finally hitting big tech — two years later

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Wednesday, Oct. 19, 2022

The pandemic rubber band is hitting the tech industry.

Microsoft (MSFT) made headlines this week when reports emerged that it slashed nearly 1,000 jobs, making it the latest tech giant to respond to economic turmoil.

The company characterized its layoffs as “structural adjustments,” stressing that it would keep hiring in “key growth areas.” The cuts still might have surprised some observers. While Microsoft's stock is down 22% over the past 12 months, some competitors have fared worse. Amazon is down nearly 32%. Salesforce plummeted 47%, and Google is down 28%.

The recent bad news in the tech industry could be a delayed blow from the pandemic. Interest rate hikes, inflation hovering at 40-year highs and sinking demand are hitting tech companies that have benefited from two years of pandemic-driven growth that saw valuations for some companies eclipse the $2 trillion mark.

“As we entered the pandemic, everybody was afraid that there were going to be these disastrous layoffs and it was going to be horrible. And there were, very briefly, in a few places…but that immediately turned around,” TECHnalysis president and chief analyst Bob O’Donnell told Yahoo Finance.

“In a weird way, it almost feels like now we're getting some of the impact of the pandemic after the fact,” he added. “I think people are recognizing they maybe over extended their hiring when they expected some of the growth that happened during the pandemic to continue in the tech industry.”

Slowing sales, falling stock prices, and layoffs

While Microsoft is easily the largest tech company to lay off employees, it’s far from the only one. Netflix (NFLX) cut off hundreds of employees as subscriber numbers faltered following the pandemic, and Snap eliminated 20% of its employees.

FILE- In this May 7, 2018, file photo Microsoft CEO Satya Nadella looks on during a video as he delivers the keynote address at Build, the company's annual conference for software developers in Seattle. Microsoft is requesting the Federal Election Commission's advisory opinion to make sure Microsoft's new free package of online account security protections for
Microsoft is laying off workers as it deals with falling PC sales. (AP Photo/Elaine Thompson, File) (ASSOCIATED PRESS)

Meta, meanwhile, is slowly pushing workers out the door via department reorganizations. Google parent Alphabet (GOOG, GOOGL), for its part, shuttered projects at its Area 120 division and asked employees to reapply for jobs elsewhere.

Microsoft’s downsizing efforts come as the PC market is experiencing its worst contraction in years. According to Gartner, PC shipments slipped 19.5% in Q3 2022. The reason for the decline? During the pandemic, consumers ran out to stores in search of PCs for everything from work to entertainment. As a result, shipments jumped 32% in Q1 2021 to 69.9 million units. Now that pandemic-powered expansion is rubberbanding back.

The drop in PC sales is hitting chip makers, too. Intel (INTC) is expected to lay off thousands of workers, with an announcement likely to take place sometime around its Oct. 27 earnings report. AMD (AMD), Nvidia (NVDA), and Micron (MU) have all been slammed by a decline in PC sales, too. Nvidia already froze hiring for the rest of its fiscal 2023.

But Microsoft doesn’t just rely on PC sales. The company’s cloud business has been a growth juggernaut for years. So why the layoffs? Falling share prices could be one reason.

“I think there's a sense of internal pressure to deliver better results for shareholders,” O’Donnell said. “And that means increasing the profitability, even though they're already making a lot of money. And I think that's what part of the challenge that we're seeing now is that the market has reacted in such a way, And therefore there's more pressure to deliver better results. And the way you can do that is reduce your costs.”

Other tech companies are looking for ways to cut costs without eliminating jobs. Apple (AAPL), for instance, is reducing production of its iPhone 14 Plus, less than two weeks after the smartphone hit the market, according to The Information.

Amazon (AMZN), which overextended itself during the pandemic boom, is looking to cut back on the number of warehouses it owns. It has shut down a number of projects including its delivery robot and a product that lets children video chat with distant family members.

The downturn could be short lived, at least for tech

On Tuesday, Amazon founder Jeff Bezos became the latest corporate titan to predict an economic downturn could come in the next few months. But according to BofA Global Research analyst Wamsi Mohan, such a decline could be short-lived if the Federal Reserve continues hiking rates.

“If we go into a protracted downturn where inflation is persistently out of control, and we go into an economic slowdown or recession, where both of those are paired together, absolutely, there will be rationalization of jobs,” Mohan told Yahoo Finance.

“But if we’re getting to the peak of rates somewhat quickly because the Fed is trying to do this in an accelerated way, we might end up in the first half of next year moving through most of the job cuts that are needed for companies to get back on the operating profit trajectory.”

This week brought a sign that tech’s downturn might be fleeting. On Tuesday, Netflix reported better than expected quarterly results, beating earnings and revenue expectations and adding 2.4 million subscribers, after it had reported declines every quarter earlier this year.

Netflix was one of the first big tech companies to lose its pandemic sheen, with subscribers sinking after millions signed up while quarantined. Perhaps, after spending time re-connecting with loved ones, Americans are finally ready to get back to their couches — and back to enjoying all that Big Tech has to offer.

By Daniel Howley, tech editor at Yahoo Finance. Follow him @DanielHowley

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