Blog

Layoffs at Technology Firms: An Indicator of a Busting Bubble?


Undoubtedly, many technology companies enjoyed an outstanding success during and after the COVID-19 outbreak. Businesses changed in several fields and we saw situations that we would have rarely expected before: switching to online shopping, online education, remote working, minimizing trips and avoiding human contact, just to mention a few. Lockdown forced humanity to look for a shelter against the confinement, and people found it in technology, which became the main protagonist in our everyday life. This scenario made companies like Zoom, Google, Apple, Meta, and others grow explosively. In the light of this unprecedented growth, IT professionals started claiming more money for the same roles, and technology companies started hiring so many new employees to meet the demand of the market. These events pushed the interest rates down and opened the door to more investors, especially beginners, into the stock market. With this high demand and the prices going up, tech companies have seen their greatest peak between 2020 and 2021. The question now is, if the technology industry seemed so promising and successful in the past two years, why do some professional investors not want to keep the investments up in this market?

Jim Chanos, a well-known American investment manager, compared this phenomenon with the revolution of the dotcom companies in 2000, which he defined as an “era on steroids” due to the exponential growth of these kind of corporations (“Jim Chanos”). On the other hand, and regardless the opinion of some experts, many technology companies affirmed that they had a solid business model, and banks stated low interest rates to ensure cash flow in the market. Some firms could not prove their profitability, thus, they created their own metrics to justify their success. Speculations are not something new in the economy, in fact we have seen this repeated times along the history, and basically it happens when some assets receive a much greater value than their real one. An aggravator in the current context is that the stock market based the value of the companies on something that is not tangible, instead of considering their capabilities to generate business in the coming years, and it was a huge mistake. This pumped a bubble that, unfortunately, has no other future but busting when the reality knocks the door, and it always happens. While some experts such as Stanley Druckenmiller (Duquesne) say that the tech bubble already popped, others like Chris Senyek (Wolfe Research) say that we are at the edge of it (“The Guardian”).

It is hard to make predictions with all the political, ethical and economic substantial changes going on. The panorama does not look very promising: the new lockdown in China due to the rise in COVID cases caused delays at the Shanghai port, the busiest one in the world. This situation created a slowdown in the supply chain because there are ships waiting to be loaded and unloaded, and this delay impacted the inflation globally. The energy system in Europe counted with Russian resources and, in light of the current conflict, an energy crisis is happening in the continent. The main decision has been to reduce the energy supply, which does not just affect only the European region, but also the world. Apparently many industries are affected and technology is not the exception.

The beginning of the fall

Contrary to the popular belief that 2022 would be a year for recovery, many organizations experienced a big fall. The first giant that exposed the situation was Netflix confirming in March the loss of 200.000 subscribers in the first quarter, and the situation worsened in April, when the company decided to withdraw the services from Russia showing support to Ukraine in the war (“Los Angeles Times”). But this is not the only case. Companies such as Microsoft, Apple, Spotify, PayPal, Amazon, revealed a loss of between 20 to 65% of market capitalization. The same fate has befallen the cryptocurrency industry, which led to freeze the investments, especially from the start-ups. Against this drastic scenario, CEOs and investors opted for a drastic decision: layoffs. The cybersecurity industry for example has strikingly decided to follow this strategy, despite a considerable growth in revenue and increase in ransomware attacks against which they must defend against. But why?

As a justification to this strategy, some experts compare the current crisis to those in 2000 and 2007, indicating that the fall in terms of employees and employability is unavoidable, that they need to protect the companies, and having less employees is a way to lower the expenses. The main focus would be now to direct the budgets to more stable assets. However, there are others saying that this is an alarmist perspective. The reality is that during the growth of the speculative bubble, technology companies spent a considerable amount of money in hiring new employees and in adjusting the company to the value they had in the market. But when the market went back to the real value, all these new employees would not be necessary anymore.  In any case it is important to understand the two sides of this coin: the benefits to the company’s finances, and the reaction of internal employees. Looking at this from the business perspective, it is self-explanatory that having fewer employees in a company shows a growth slowdown and considering the decrease in the stock prices it represents a big financial relief. On the other hand, considering the situation from employees’ perspective, seeing many colleagues being fired from their roles awaken a general alert within the organization, and at the same time may push them to improve their performance to avoid being in those shoes. If we look at it from this perspective, a company that is facing difficult times needs people who are motivated to develop new ideas and use their endeavors to move out from that situation. In the end, once the bad times have passed, the organization will only keep those human resources who demonstrate tenacity, creativity, strength and high performance.

Although the advantages seem to be clear, a layoff impacts the business unavoidably. When the company recovers and looks for new talents, people will think twice before accepting an offer because they might think that their position would be at risk against the possibility of another financial crisis. Going deeper, we can think about the legal consequences for the company. There are agreements in different countries to compensate taxes for instance, and a massive layoff could affect the initial negotiations with the governments. In a similar vein, if the company decides to go for a merger to preserve the business, legal issues and employees’ condition would be a determinant factor that could block the negotiation. It is difficult to deny that a massive layoff causes stress on the employees, and if the situation escalated, probably some companies would discard the possibility of merging, reducing then the chances to get a better deal.

What comes next?

With the volatility of the market in sight, and the political and economic uncertainty present, many companies are just in a brief pause to analyze the full picture and decide the next steps. Financial analysts and investors recommend putting the money into companies that base their value in solid and tangible actives, and to split the investment, avoiding big expectations only on one of them. Experienced investors are very careful at the moment when investing in technology companies because it is highly risky to root for companies that created their own metrics to justify their great valuation in the market instead of having a look at the actual profits and benefits of the organizations. It is true that during at least the last 10 years, the market has prioritized the growth over the stability, and this offered more uncertainty around the economy. However, there is something certain, and is that the show must go on. A good way to go would be looking at the current scenario not as a crisis, but as a stage in which technology companies should come up with new and more attractive ideas to offer in the market, other than new metrics and promises. Moreover, we could say that the companies should work on low-cost proposals and B2B agreements, where the boost of income could make a great impact to some extent.  

It is definite that surviving in a highly competent market such as the IT sector is hard, and although layoffs seem to be the necessary path to cut the budget, there are other solutions that could make a less tragic impact to the business, the society and the global economy.  

Read this article to know more about the IT business in the market: Business Continuity and the Cloud.

Stay Connected

KuppingerCole on social media

Subscribe to our Podcasts

KuppingerCole Podcasts - listen anywhere


How can we help you

Send an inquiry

Call Us +49 211 2370770

Mo – Fr 8:00 – 17:00