Tech’s longtime highfliers are growing up by getting smaller

Technology corporations are learning an old lesson from Wall Street: maturing means shrinking.

Meta and Amazon saw their shares spike on Friday following their fourth-quarter earnings reports. While revenue for each topped estimates, the story for investors is that they are showing their ability to do more with less, an alluring equation for shareholders.

There’s also a recognition that investors value money, in lots of cases, above all else. The tech industry has long preferred to reinvest excess money back into growth, ramping up hiring and experimenting with the following big thing. But following a yr of hefty layoffs and capital preservation, Meta on Thursday announced that, for the primary time, it should pay a quarterly dividend of fifty cents per share, while also authorizing a further $50 billion stock repurchase plan.

“The important thing with these corporations is de facto that they are capable of reinvent themselves,” said Daniel Flax, an analyst at Neuberger Berman, in an interview with CNBC’s “Squawk Box” on Friday. They “proceed to speculate for the long run and play offense while at the identical time manage expenses on this tough environment,” he said.

Amazon is less aggressively moving to send money to shareholders, but the subject is definitely being discussed. The corporate 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 added capital returns.

“Just really excited to really have that query,” finance chief Brian Olsavsky said in response. “Nobody has asked me that in three years.”

Olsavsky added that “we do debate and discuss capital structure policies annually or more often,” but said the corporate doesn’t have anything to announce. “We’re glad to have the higher liquidity at the tip of 2023 and we’ll attempt to proceed to construct that,” he said.

After years of seemingly unfettered growth, the largest web corporations on the earth are firmly right into a latest era. They’re still out looking for the perfect technical talent, particularly in areas like artificial intelligence, but headcount growth is measured. Staffing up in certain parts of the business likely means scaling back elsewhere.

For instance, Meta CEO Mark Zuckerberg told investors that in the case of AI, “We’re playing to win here and I expect us to proceed investing aggressively on this area as a way to construct probably the most advanced clusters.”

The story is playing out across Silicon Valley. January was the busiest month for tech job cuts since March, in response to the web site Layoffs.fyi, with almost 31,000 layoffs at 118 corporations. Amazon and Alphabet added to their 2023 job cuts with more layoffs last month, as did Microsoft, which eliminated 1,900 roles in its gaming unit shortly after closing the acquisition of Activision Blizzard.

Downsizing this week hit the cloud software market, where Okta announced it was cutting about 400 jobs, or 7% of its staff, and Zoom confirmed it was eliminating lower than 2% of its workforce, amounting to shut to 150 positions. Zuora announced a plan to cut 8% of jobs, or almost 125 positions based on probably the most recent headcount figures.

Evan Sohn, chairman of Recruiter.com, called it a “very confusing job market.” Last yr, tech corporations were responding to dramatically changing market conditions — soaring inflation, rising rates of interest, rotation out of risk — after an prolonged bull market. Meta slashed over 20,000 jobs in 2023, Amazon laid off greater than 27,000 people, And Alphabet cut over 12,000 positions.

The economy is in a really different place today. Growth is back at a healthy clip, inflation appears under control and the Federal Reserve is indicating rate cuts are on the horizon this yr. 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 nonfarm payrolls expanded by 353,000 last month, the Labor Department’s Bureau of Labor Statistics reported Friday. 

Tech stocks are booming, with Meta, Alphabet and Microsoft all at or near record levels.

However the downsizing within the industry continues.

“Firms are still within the cleanup from ’23,” Sohn told CNBC’s “Worldwide Exchange” this week. “There may very well be a flipping of skills, different skills obligatory to essentially handle the brand new world of 2024.”

Wall Street is rewarding tech corporations for improved discipline and money distribution, however it raises the query about where they’ll turn for significant growth. Apart from Nvidia, which had a banner 2023 resulting from soaring demand for its AI chips, not one of the other mega-cap tech corporations have been growing at their historic averages.

Even Meta’s better-than-expected 25% growth for the fourth quarter is a bit misleading, since the comparable number a yr ago was depressed resulting from a slowing digital promoting market and Apple’s iOS update, which made it harder to focus on ads. Finance chief Susan Li reminded analysts on Thursday that as 2024 progresses, the corporate will likely be “lapping periods of increasingly strong demand.”

By late this yr, analysts are projecting growth at Meta will likely be back right down to the low teens at best. Growth estimates for Amazon and Alphabet are even lower, a great indication that calls for capital allocation measures may only get 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 desires to bring shareholders together with him and is highlighting that Meta is now a mature, grown-up business,” Barringer said.

— CNBC’s Annie Palmer contributed to this report

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