The wave of layoffs and hiring pauses in Silicon Valley at a time of economic turmoil suggest big tech companies “are acknowledging a new reality,” investment bank Jefferies wrote in a research note Wednesday.
It’s scary, but what does this state of affairs really mean?
“The new reality is that demand is waning,” Brent Hill, the report’s lead analyst, told Fortune. “Tech companies have been aggressively hiring, and if we do get into a recession, more layoffs will be inevitable.” .”
Analysts cited TrueUp data as saying that about 210,000 technology company employees have been laid off this year, with up to 40% of the layoffs occurring in the fourth quarter. Analysts at Jefferies found that the average number of job openings at Internet and software companies is now 36% lower than it was at the start of the year. Hill said this exposed the “overextension” of tech companies in “a period of cheap money”.
Among the big tech companies, Meta announced plans to cut 11,000 jobs, or 13% of its workforce. Amazon has already begun layoffs of a similar scale, according to media reports, but it remains unclear how many workers will end up being laid off. Meanwhile, Microsoft has announced two rounds of layoffs this year, the most recent of 1,000 in October.
Jefferies noted that Google (Google) is the only large-cap technology company that hasn’t announced layoffs, but Google put hiring on hold earlier this year.
“You’re going to find evidence that companies, large, mid-sized and small, are in a period of rationalizing what’s happened,” Hill said, adding: “The demand is no longer there, and they’re under enormous cost pressure. Jefferies noted that the headcounts of the three companies stand in stark contrast to their continuing decline in revenue, underscoring the mismatch and the need for such rationalization.
The layoffs of technology companies stem from over-recruitment during the epidemic. Analysts pointed out that technology companies need to “combine current demand trends and re-improve team productivity.”
“The reduction in revenue leads to a decrease in unit revenue generated by employees, and companies have to slow down their hiring,” Hill said.
Both Amazon and Meta posted poor revenue performance in the third quarter of this year, in stark contrast to their success during the pandemic.
Hill quoted Buffett’s “naked swimming theory” and said: “I think this period can expose which companies are ‘professional athletes’ and which are ‘amateur players’.” Buffett believes that various problems will be exposed when the market goes down. Hill said there would be more layoffs in the future, but he could not confirm the size of the layoffs, only that they would be much higher than the current level.
He said: “If you work in a technology company, be prepared – the future is going to be very difficult. You better let the company see your productivity, because this is what the company needs, and this will not be the first time.” A wave of layoffs.”
Jefferies believes that the US economy will fall into recession in the third quarter of next year. As a result, Hill said a recession isn’t here yet, and that “tech companies have been known to be overly optimistic.”
“We don’t want to be sensational,” he said. “We’re not trying to draw attention to ourselves. We’re just acknowledging the fact that tech companies have to adjust their cost structures because in a downturn, if they can’t control revenue, they can only control part of it.” One thing. That’s spending. And the biggest spending in the tech industry is people.”
Hill said this “new reality” in the tech industry is a natural part of the economic downturn, and tech companies aren’t “exempt.” (Fortune Chinese website)
Translated by: Liu Jinlong
Reviewer: Wang Hao
Silicon Valley’s wave of layoffs and hiring freezes amid a faltering economy reflect Big Tech “acknowledging a new reality,” investment bank Jefferies said in a Wednesday research note.
That’s frightening, but what does that mean?
“The new reality is that demand is fading,” Brent Thill, the lead analyst on the note, told Fortune. “And employee hirings have been so brisk that if we’re effectively headed into a recession, it’s only inevitable that we’re going to have more cuts.”
Around 210,000 tech employees have been laid off this year, with a whopping 40% of them coming in the fourth quarter, analysts wrote, citing data from TrueUp. Jefferies’s analysis found the average company in its internet and software coverage universe has 36% fewer listings now than at the start of this year. Thill said it’s a signal of the “excess” that tech brought on during a “period of easy money.”
Among the tech megacaps, Meta announced its plan to lay off 11,000 employees—a 13% headcount reduction. Amazon has started layoffs of a reportedly similar size, although it’s still unclear how big the company will ultimately gouncout. Meanwhile, Microsoft has two of layoffs this year, with the latest in October cutting 1,000 jobs.
Google is the only mega-cap tech company that has not announced layoffs, Jefferies pointed out, although it noted that it implemented a hiring freeze earlier this year.
“You’re seeing continued evidence that large, medium, and small companies are all in a rationalization period of what’s happening,” Thill said, adding that “the demand is not there and their cost pressures are out of line.” The Jefferies note contrasted these big three firms’ headcount in contrast with their falling revenues, illustrating the mismatch—and the rationalization that needs to happen.
And the reductions in headcount stem from overhiring during the pandemic, which the analysts note are needed to “regain operating efficiency with a headcount that matches current demand trends.”
“If your revenue per employee is failing because revenue is not there, then you slow headcount,” Thill said.
And both Amazon and Meta underperformed in their third quarter earnings of this year—quite a shift from their pandemic-era success.
“I think this is kind of what really separates the true athletes from the amateurs,” he said, reminiscent of Warren Buffett’s famous “swimming naked” aphorism about how a down market exposes a lot of things. Still, Thill said there will be more layoffs to come, and he doesn’t know how big that number will get—but it’s going to be a lot higher.
“If you’re in tech, buckle up—it’s gonna be a tough ride,” he said. “And you better make sure you show up on the top of the efficiency page because they’re looking and this isn’t the first wave of cuts.”
Jefferies’ house view is that the economy will head into a recession in the third quarter of next year. So the recession hasn’t even hit, Thill said, and “technology companies have been notoriously too bullish.”
“We’re not trying to be dramatic,” he said. “We’re not trying to draw attention. We’re just trying to be realistic, which is [that] these companies have to get the cost structure in line because in the economic downturn, if they can’t control the revenue, there’s only one thing that they can control. And that’s expense. And the number one expense in tech are the people.”
Still this “new reality” for the tech industry is a natural part of an economic downturn—and tech is not “immune,” Thill said.
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