They set the pace on the US stock markets and are the darlings of Wall Street.
Technology companies known as “the magnificent 7” do not stop growing in sales, in profits and in value.
According to analysts, together they will sell 12% more this year and another 12% in 2025. Well above their peers in other industries.
Alphabet -the parent company of Google-, Apple, Amazon, Meta and Microsoft They collectively earned close to US$327 billion, 25.6% more than the previous year. A figure close, for example, to the total GDP of Colombia or Chile.
And yet this exclusive group, which Tesla and Nvidia also belong, is going through a phase of layoffs that in some cases are even considered massive and that add to those carried out last year.
Microsoft cut its workforce in July 2023 and will do so again in 2024 laying off 1,900 people, after closing a purchase agreement for Activision Blizzard for US$69 billion.
The same happens with Amazon that will get rid of 35% of the workforce of its Twitch platform and another hundred from Amazon Prime, following in the wake of last year’s 9,000 cuts.
As if that were not enough, many other smaller companies have joined this exclusive group. Total, Almost 32,000 workers have been laid off from 122 technology companies since the beginning of the year, according to the Despidos.fyi website cited by Reuters. And there are 11 months ahead.
Paypal will have 2,500 fewer employees this year, Spotify with 1,500, eBay will lay off 1,000 and Snapchat will cut its workforce by 500 people, to give examples of well-known firms in the technology industry.
All of this has led many to compare what is happening to the early 2000s, when the rise of the internet led to the dotcom technology bubble.
For Mathieu Racheter, chief analyst at Julius Baer, this analogy is weak because the price of mega-cap technology stocks has not yet reached the bubble of the leaders of the 2000s.
Baer adds that “the magnificent 7” are highly cash-generating, which would help in case of any problems.
So what is behind this second wave of cuts?
1. Artificial intelligence and strategic changes
“The history of the technology sector includes the rise and fall of large companies that end up affected by disruption and being replaced by more innovative ones of the next generation,” recalls Brice Prunas, artificial intelligence manager at ODDO BHF AM.
This is what happened in the dotcom bubble and in this decade, the boom in artificial intelligence (AI) represents a revolution.
“Take the language learning company Duolingo as an example. Some of its laid-off staff (or “disengaged” to use the company’s clumsy term) are writers and translators, who will be replaced by algorithms” explains the Quarck website.
AI is fast. What takes a human writer 60 to 90 minutes to write, AI can do in 10 minutes or less.
Earlier this year, a Goldman Sachs report said that possibly AI could replace the equivalent of 300 million jobs full time.
“We already saw it in the technology bubble of the 2000s, disruptions always lead companies to a reallocation within their structure,” says Javier Molina, senior market analyst for eToro.
“On one side we see strategic changes and division closures and on the other a reorientation towards artificial intelligence. This leads to eliminating certain jobs in many processes that are automatic,” says Molina.
It’s the way to increase your productivity.
2. The memory of 2022 and the closure of projects
He technology sector eliminated 168,032 jobs in 2023 and accounted for the highest number of layoffs across all industries, according to a report by consulting firm Challenger, Gray & Christmas, Inc.
Amid the wave of euphoria over the success they achieved during the pandemic, many Silicon Valley companies increased hiring and expanded their growth plans with the idea that the wind would continue to blow in their favor.
But it was not like that, and When the music stopped playing, the layoffs began massive in 2022 and much of 2023.
Another reason that conspired against the new projects was the increase in interest rates by the United States Federal Reserve in response to uncontrolled inflation.
Borrowing money is now more expensive and many technology companies require a lot of capital, especially in the early stages of development.
“Recent rate hikes have accentuated the limit situation of many projectswho in other times could invest, aspiring to grow and achieve profits in a later phase,” says Andrés Allende, manager of the DIP Value Catalyst fund at A&G Fondos.
“However, now the domino effect of more expensive financing has dried up investments. This ultimately leads to the closure of more and more technological projects,” he adds.
With the cuts, companies They seek to be as healthy as possible in a time of economic uncertainty.
Prunas, from ODDO, agrees with this idea. “Below the ‘mega-caps’ (mega-cap companies), many Smaller companies are going through very difficult timeswhich explains the reductions in their workforce,” says the expert.
3. A brutal cycle
Even the mega-caps have resorted to cost cuts to satisfy calls for greater benefits that their investors demand.
But the thing is that “cycles in technology tend to be like this, abrupt… but also faster and more flexible. Soon many of these companies and projects They will adapt and innovate again. Those that survive can once again be very promising opportunities,” explains Allende.
“Until the new cycle comes to life – we are already beginning to see some signs – The difficulties of the technology sector could significantly impact consumption and investment in other sectors, as jobs in tech They fall into income levels much higher than the average,” adds the A&G expert.
Analysts agree that we must differentiate what happens in small companies, which is a matter of survival, from what happens with large technology companieswhich has more margin and large amounts of capital to face turbulence.
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