Tech Companies Embrace Shrinking: Meta and Amazon Show Ability to Do More with Less

Technology Companies Embrace Discipline and Cash Distribution

Technology firms are experiencing a familiar lesson from Wall Street: as they mature, their size tends to shrink. Both Meta and Amazon saw an increase in their shares on Friday, following their fourth-quarter earnings reports. Despite exceeding revenue estimates, investors were drawn to their ability to achieve more with less, an attractive proposition for shareholders. Furthermore, investors value cash above all else in many cases. Historically, the tech industry has preferred to reinvest surplus cash into growth by expanding its workforce or exploring the next big thing. However, following a year of significant layoffs and capital preservation, Meta recently announced its decision to pay a quarterly dividend of 50 cents per share, and it is also authorizing another $50 billion stock repurchase plan for the first time.

Daniel Flax, an analyst at Neuberger Berman, stated on Friday’s “Squawk Box” interview, “The key to these firms is that they can reinvent themselves. They continue to invest for the future, playing offense, while simultaneously managing expenses in this challenging environment.”

Focus on Shareholder Returns

Amazon, one of the largest internet companies in the world, has been considering additional capital returns to its shareholders. While the company had initiated a $10 billion buyback program in 2022, it has not made any such announcement since then. During a recent earnings call, a Morgan Stanley analyst enquired about the company’s plans for additional capital returns. In response, Brian Olsavsky, the finance chief, expressed his excitement at being asked about the topic, which had not been brought up in the last three years.

Olsavsky went on to clarify that the company regularly debates and discusses its capital structure policies, but currently has nothing to announce. He stated that the company is pleased to have better liquidity at the end of 2023 and plans to continue building on that.

Despite the continued search for technical talent, particularly in areas such as artificial intelligence, Amazon and other major internet companies have entered into a new era where headcount growth is measured. Staffing up in certain parts of the business may mean scaling back in other areas.

Playing to Win

During an investor call, Meta CEO Mark Zuckerberg expressed the company’s aggressive intent to invest in AI, stating that they are “playing to win” and aiming to build the most advanced clusters in the field. However, Zuckerberg also noted that the company plans to keep hiring relatively minimal compared to historical trends, in order to maintain lean operations.

This approach is consistent with the broader trend of tech companies looking to hold the line on headcount, if not reduce it altogether, in the face of economic uncertainty. In January of this year, the tech industry experienced the busiest month for job cuts since March, with nearly 31,000 layoffs at 118 companies. Amazon, Alphabet, and Microsoft all added to their job cuts for 2023 in February, with Microsoft eliminating 1,900 roles in its gaming unit soon after its acquisition of Activision Blizzard.

The cloud software market has also seen downsizing recently, with Okta cutting around 400 jobs, or 7% of its workforce, and Zoom eliminating less than 2% of its workforce, or around 150 positions. Zuora announced an 8% job cut, or nearly 125 positions based on the most recent headcount figures.

Evan Sohn, chairman of Recruiter.com, described the current job market as “very confusing.” Tech companies are grappling with changing market conditions, such as rising inflation, interest rates, and rotation out of risk, after an extended bull market. In response, several large tech companies, including Meta, Amazon, and Alphabet, have cut tens of thousands of jobs in recent years.

The present economy is markedly different from its earlier state, with healthy growth, controlled inflation, and an indication from the Federal Reserve that rate cuts are on the horizon. Unemployment rates have held steady at 3.7% in January, declining from 6.4% three years prior, when the economy was only beginning to recover from pandemic-imposed lockdowns. The Labor Department’s Bureau of Labor Statistics reported that nonfarm payrolls expanded by 353,000 last month.

While tech stocks such as Meta, Alphabet, and Microsoft are booming, the industry is still undergoing downsizing. According to Sohn, companies are still in the process of cleanup from 2023, and the new world of 2024 may require a flipping of skills to adapt to the changing demands. While Wall Street is rewarding tech companies for their improved discipline and cash distribution, the question of where they can turn for significant growth remains unanswered. Except for Nvidia, which had a banner year in 2023 due to soaring demand for its AI chips, none of the other mega-cap tech companies have been growing at their historical averages.

Meta’s better-than-expected 25% growth for the fourth quarter is somewhat misleading since the comparable figure from a year ago was depressed due to a slowing digital advertising market and Apple’s iOS update, which made targeting ads more difficult. Finance chief Susan Li reminded analysts on Thursday that as 2024 progresses, the company will be “lapping periods of increasingly strong demand.” By late this year, analysts project that growth at Meta will be back down to the low teens at best. Growth estimates for Amazon and Alphabet are even lower, indicating that calls for capital allocation measures may only get louder.

According to Ben Barringer, technology analyst at Quilter Cheviot, Meta’s decision to pay a dividend was a “symbolic moment” in that regard. He believes that Mark Zuckerberg intends to bring shareholders along with him and is demonstrating that Meta is now a mature, grown-up business.