Spotify, Alphabet And Meta Lead Tech Stock Surge After Massive Layoff Announcements

Topline

Just days after layoff announcements from Google parent Alphabet and online retailer Wayfair boosted the firms’ stock values, Spotify shares rallied Monday as the streaming service cut hundreds of jobs to help rein in costs—a phenomenon analysts believe will continue throughout the year, boosting market values but possibly pushing millions of people into unemployment ahead of a potential recession.

After Silicon Valley’s years-long spending spree, tech firms are starting to cut back, and investors … [+] are rallying around the news.

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Key Facts

Spotify stock surged 5% Monday after CEO Daniel Ek said the firm would cut 6% of jobs, representing some 600 workers, to control costs “in a challenging economic environment,” lamenting he was “too ambitious” in driving up costs after strong growth during the pandemic.

Heading up gains on Friday, Wayfair stock skyrocketed more than 20% after the firm announced it will cut 10% of its global workforce, representing some 1,750 employees, “to be more agile” amid reduced sales, said CEO Niraj Shah, who lost his billionaire status as shares collapsed 80% last year.

Shares of Alphabet similarly posted gains, jumping 5% and adding more than $50 billion in market value, following the tech giant’s decision to lay off 12,000 workers on Friday, with CEO Sundar Pichai telling employees the company spent too much after “dramatic growth” during the pandemic and “hired for a different economic reality than the one [faced]

In a Friday email, Wedbush analyst Daniel Ives said he expects more tech layoffs will be a “major theme” throughout the earnings season, as Silicon Valley shifts into cost-cutting mode to help prepare for a potential recession following a decade of “hyper growth” that pushed many firms to overload on spending.

Ives went on to say the head count cuts in the tech sector are “the first major step” toward stabilizing the crop of recently struggling stocks, pointing out shares of Meta have skyrocketed about 50% since the firm announced in November it would cut more than 11,000 jobs, and predicting tech stocks as a whole will surge about 20% this year.

Oanda analyst Edward Moya expects the layoff theme will spread across other sectors throughout the year, with banking giant Capital One on Friday becoming one of the first non-tech firms to announce massive layoffs, reportedly scrapping 1,100 tech positions and boosting shares more than 6% on Friday.

Surprising Fact

Other stocks rallying after recent layoff announcements include Amazon, which is up 15% since announcing it would commence job cuts earlier this month, and Coinbase, which has climbed nearly 40% since its layoffs on January 10.

Key Background

Technology stocks collapsed last year as the Federal Reserve’s interest rate hikes started to slow down the economy in a bid to tame inflation, effectively reversing a slew of outsize stock gains bolstered by government stimulus efforts during the pandemic. After skyrocketing 22% in 2021, the tech-heavy Nasdaq collapsed 33% in 2022—far worse than the S&P 500’s 19% decline. Amid the weakness, major corporations cut more than 100,000 jobs last year, with the layoffs only intensifying in recent weeks. “Massive layoff announcements will stop wage pressures from rising,” explains Moya, noting the trend should push inflation back toward the Fed’s target by the end of the year.

Contra

Despite their gains on Friday, Wayfair shares are still down a staggering 86% from an all-time high in 2021. Meta stock, too, is still down about 64% from record levels in 2021.

What To Watch For

Earnings season will drag on over the next month, with a slew of technology firms—including Tesla, Microsoft and IBM—expected to report this week.

Tangent

With major layoff announcements expected to continue, Bank of America economists on Tuesday told clients they expect the unemployment rate will rise from its current level of 3.5% to 5.1%—suggesting more than 2.5 million Americans could lose their jobs.