Slumping stock prices and slowing growth has the biggest technology companies — and investors — thinking about what it will take to reverse their fortunes. Finding new, lucrative sources of growth is the preferred way out, but it's hard to find opportunities big enough to move the needle when your revenues are already in the tens or hundreds of billions of dollars per year.
That makes cost cuts the most obvious way to boost profit, an uncomfortable option for an industry that hasn't had a major belt-tightening phase in 20 years. After investors showed their displeasure with the lack of cost control demonstrated by tech companies in the third quarter, it appears that management teams have had a change of heart. In the past two weeks both Facebook parent Meta Platforms Inc. and Amazon Inc. have begun laying off staff, with plans for about 10,000 job cuts each in various departments. Earlier this week a large investor in Alphabet Inc. wrote to that company pushing for meaningful cost cuts there as well. (Elon Musk cut about half the workforce at Twitter Inc. after his takeover, but that's a different story.)
Investors are particularly irritated about what one might call the "science projects" that many big tech companies have been pursuing, eating up billions in capital without contributing much in revenue. Examples of this include Amazon's spending on side projects like Alexa, which is believed to account for more than $5 billion in annual losses, and Alphabet's investments into its self-driving vehicles unit, which has piled up $20 billion in losses so far. At Meta, Mark Zuckerberg staked the whole company's future on the development of new virtual and augmented reality products, renaming the company to steer its identity away from its core social-media business. Meta's Reality Labs unit has lost almost $10 billion so far in 2022. Zuckerberg apologized for increasing investment too much, too soon as he announced the job cuts.
To be fair, in the late 2010s when interest rates and inflation were low and tech stocks commanded loftier valuations, these moonshot-type investments made more sense. Investors were valuing tech companies more for growth than profitability. At one point, Alphabet's self-driving division was seen as being worth $175 billion, suggesting that these large-scale non-core divisions being incubated within the larger companies might pay off. Profit margins in core businesses were generally stable or expanding at a time when revenue growth was strong, suggesting nearly limitless resources to pursue any ideas that could potentially one day become as big and profitable as Google Search, YouTube, Facebook, Instagram, or Amazon Web Services.
A few years later and the world has changed. Interest rates are no longer at zero. Core markets have matured and in some cases are feeling the effects of slower economic growth. Profit margins have come under pressure between the combination of slowing growth and rising costs. The investor bases that these companies now have cares more about profitability and returning cash to shareholders rather than outsize bets on the future.
And perhaps most importantly, after these companies have collectively spent tens of billions of dollars a year on science projects, they don't have much to show for it in the way of revenue-generating activity. It's unclear now whether companies that have grown to become massive conglomerates are nimble enough to create something out of nothing. That might be a job best left to startups and more-focused smaller companies, with investor bases more amenable to taking that kind of risk.
Even if these companies technically have the resources to spend endlessly on endeavors that may never pay off, it's not very macroeconomically efficient at a time when inflation is high and there is still strong demand for tech workers. Meta and Amazon and Alphabet are essentially hoarding engineers at a time when banks, insurance companies and the government need engineers too.
Appeasing investors by winding down these money-losing divisions might also, conversely, be the spark Silicon Valley needs for its next wave of innovation. While it's hard to quantify, it seems as if the well has run a bit dry there of late; It's been awhile since the emergence of a startup on the scale of Uber Technologies Inc. or Airbnb Inc. Labor hoarding by big tech may be partially to blame.
In any case, investors no longer care for these non-core pursuits. The companies have a spotty record, at best, of proving that they're worth doing, and the rest of the economy remains hungry for tech talent. It's time to admit defeat and move on.
This article was provided by Bloomberg News.