Some of the most prominent American companies have been slashing jobs recently, particularly in the technology sector. In January, there were over 75,000 layoffs in the tech industry alone, signaling a worsening outlook. However, are these companies facing imminent risk to profitability?
Some, like WeWork and Spotify, had negative EBITDAs. Others, like Microsoft, earned nearly $10 million (EBITDA) for every worker laid off.
2022 wasn’t an easy year for many companies, but we’re seeing the earliest and largest layoffs coming from Big Tech. Those are some of the country’s most successful companies – over the past few years, it seemed like they could do nothing but win. When looking at the 2022 EBITDAs of these uber-successful companies, it’s hard to fathom why layoffs may have been necessary.
EBITDA, a measure of company profits that ignores interest, taxes, depreciation, and amortization, fell over the past year for many of the biggest tech firms, such as Google, Amazon, and Meta (formerly known as Facebook). That’s a tough pill to swallow for companies whose huge valuations rely on very high growth rates.
Though performance looks strong at many of these companies, profits declined year over year at several of them. Much of it concerns one of the year’s most-discussed issues: rising interest rates. Large tech companies saw a lot of money flow into their stock prices because federal interest rates were so low for a long time.
With low-interest rates, investors take more risks to get a return on their dollar, like investing in equities and real estate. Much of the money that may have otherwise gone somewhere safer, like corporate or government bonds, went to the stocks of strong, fast-growing companies like Google, Amazon, and Microsoft.
That created high expectations for those firms and gave them easy financing to help meet those high expectations. However, as interest rates have risen to fight inflation, investors are jumping into safer options that offer higher yields. Additionally, it’s more expensive for investors to borrow money, reducing investment and spending.
Tech companies, which have been stock market darlings for over a decade, now have to work harder to support high valuations in a tougher environment. That means making tough decisions, like massive layoffs. In a more symbolic gesture, tech CEOs are taking a big pay cut to start the year.
The driving force behind these layoffs is that most companies, especially big tech companies, have lower valuations, growth expectations, and earnings performance than they had a couple of years ago. Amazon, Meta, and Alphabet, which combined to lay off 40,000 people since November, have all had tough years, especially by their standards.
The main reasons for recent layoffs are gloomier economic expectations (many companies and analysts expect a recession this year) and a desire to deliver some value for shareholders after a very tough 2022 for stock prices. If that value can’t come from the top line in the form of revenue, it has to come from the bottom line by cutting expenses, like payrolls.
Meta is a prime example of this dynamic: Though 2022 was not Meta’s best year, its stock price surged in early 2023 after restructuring. Restructuring costs cut into Meta’s earnings for last year, but investors were pleased that the company decided 2023 would be a “Year of Efficiency.”
Seeing companies post massive profits while laying off workers is an uncomfortable reality of the 21st-century economy. However, recent job cuts are a response to a worsening economic outlook and unsteady stock valuations. Over the next few months, we will see if predictions of a recession come true or if conditions improve.
In the meantime, tens of thousands of workers must face the stress of securing new employment. Now that we know the factors that led to their layoffs, our next study will explore how these workers handle the current economic uncertainty and reinvent themselves in new careers.
All 2022 EBITDA figures came from Yahoo! Finance or macrotrends.net. Layoff figures were from the following news reports: