Is Tech in Trouble?

Over the last decade, technology has been the best performing sector within the S&P 500 index. Companies like Apple, Amazon, and Netflix have shaped how we go about our daily lives. This was put on full display in 2020 when Covid restrictions limited our ability to go out of our homes and ushered in the ‘new normal.’ Hearing stories of first-time Amazon users became quite common, and the corporate earnings followed. In Q2 of 2020, Amazon had expected revenue of $81.53 billion and an estimated earnings per share of $1.46. However, when they reported their actual results, their expectations were far from accurate. Amazon beat their revenue target by over $7 billion and had actual earnings per share of $10.30 (almost $9 higher per share). Apple experienced similar growth, but one year later. From 2020 to 2021, Apple grew revenue by over 33%, and earnings per share by 71%. Both Apple and Amazon were a couple of the biggest benefactors of the Covid restrictions, technology firms across the board performed well.

Fast forward to today and the tech sector finds itself in a very different situation. Last year the technology sector was down roughly 27% due to high inflation and interest rates. Tight monetary policy has significantly limited growth forecasts, and slowed down new startups. While some positive performance has returned to start the year, mass layoffs have instilled additional fear in the eyes of investors. According to TechCrunch there have already been over 150,000 layoffs in the first 3 months of this year and there are no signs of it slowing down. Large and small cap companies alike are experiencing the pain of having to let employees go.

What is causing these layoffs? Inflation? Interest rates? Financial instability? The reality is all of these factors are playing a role, but one thing that isn’t being talked about is the significant hiring that went on between 2019 and 2022. So is the sector really in trouble, or is this simply a trimming of built up human capital?

With the growth experienced over the last few years, tech companies began to accumulate and spend cash very quickly. The low interest rate environment allowed companies to push the accelerator on growth efforts, namely hiring.   

As shown above, these illustrations depict a significant increase in hiring practices during the last few years. Seven companies grew their workforce by over 50%. Amazon alone hired 750,000 workers in a two year span. That is more than the entire population of Alaska (740,000 people). The Covid era not only brought significant earnings, it also brought much looser hiring practices. Moving to a fully remote workday allowed for significant flexibility. Instead of potential new hires scheduling in person interviews, everything was done from your home on camera. Companies no longer had to worry about having desks or space for new hires, they simply needed to know you could do your job from home. This brought the cost of new labor down significantly and, as the figures above showed, companies took advantage of it. When conditions began to worsen in 2022 and into this year, the inflated hiring numbers could not last.

It is my belief that these layoffs have a lot more to do with the overhiring practices that occurred between 2019-2022 than the current economic conditions. CEOs of some of the largest companies share in this sentiment.

“I take full responsibility for the decisions that led us here. Over the past two years we’ve seen periods of dramatic growth. To match and fuel that growth, we hired for a different economic reality than the one we face today.”

— Sundar Pichai, chief executive, Jan. 20

“At the start of Covid, the world rapidly moved online and the surge of e-commerce led to outsized revenue growth. Many people predicted this would be a permanent acceleration that would continue even after the pandemic ended. I did too, so I made the decision to significantly increase our investments. Unfortunately, this did not play out the way I expected.”

— Mark Zuckerberg, chief executive, Nov. 9

While tech has had a rough couple of years, I do not believe tech is dead. These mass layoffs certainly hurt in the short run, but may produce better results into the future.