Are Layoffs A Bad Sign For Investors?

Key Takeaways

• Earlier this month, Microsoft announced that it will lay off a substantial number of employees.
• Around 1,000 employees will be impacted, according to the announcement.
• Microsoft is one of many companies laying off workers as it adjusts to the changing times.

When a company announces layoffs, that’s usually not a good sign for the economy. That’s especially true when several companies announce layoffs in the same week. The tech giant Microsoft has announced upcoming layoffs, joining other tech companies like Intel.

No one wants to see layoffs, it makes every worker feel uncomfortable watching their peers struggle to adjust to a sudden lack of income. For those who experience a layoff, the sinking feeling of needing to shift gears and find another income stream is not a pleasant experience.

Although most of us view layoffs as a sign of trouble for a company, that’s not always the how investors see it. In fact, cutting down on labor costs could help a company boost profits.

Let’s take a closer look at what we know about Microsoft’s layoffs, and what this really means for investors.

What’s happening?

Earlier this week, Microsoft announced major layoffs, with staff cuts planned across multiple divisions. The layoffs are expected to include around 1,000 employees. According to TechCrunch, these layoffs will impact less than 1% of Microsoft’s sizeable workforce of 180,000.

The round of cuts comes after Microsoft spent time and energy improving compensation packages for employees. In May, the company’s CEO, Satya Nadella, announced that the budget for merit-based salary hikes would double. The increased compensation was part of a strategy to retain top employees.

Microsoft’s reasons for layoffs

Although the layoffs are spread out across the company, some of the impacted departments include gaming and government services.

These layoffs are reportedly a part of ‘structural adjustments’ — evidence that the company may be shifting gears to streamline its workforce in the face of extensive macroeconomic issues facing every company in the country.

In case you haven’t looked at the economy lately, it’s been a tumultuous time for everyone. Interest rates are rising, inflation is sky high, and the political world is on edge due to the precarious battle between Russia and Ukraine.

As households start to tighten their belts, companies must follow suit. In the face of such economic turmoil, Microsoft isn’t the only company making changes to its workforce. Many other companies like Netflix, Intel, and Meta have also recently announced layoffs.

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Layoffs, an investor’s perspective

When a company starts to lay off workers, that’s usually a bad sign.

After all, the company is making cuts presumably to keep the rest of the operation afloat, or at least profitable. As a company reduces its workforce, it pays less in wages and benefits. If a company lays off a significant percentage of its workforce, it taps into major cost savings.

Ultimately, this can help the company’s bottom line. That’s especially true if the company is able to retain a critical mass of employees to get the job done. Although the company might not make as much forward progress toward overarching projects, a smaller workforce may be able to handle the core activities of the business.

A smaller workforce will also come in handy for a company that correctly predicts that demand for its products or services is dropping. With less demand, the company can reasonably support fewer workers. Sometimes the company’s best option for long-term viability is to reduce its workforce before times get too tight.

Conventional wisdom suggests that layoffs are a necessary part of maintaining the long-term future of companies during an economic downturn. In light of that conventional wisdom, many stocks tend to rise after a layoff announcement. However, the long-term impacts of a layoff are often negative.

One article published in The Journal of Financial Research compared stock prices after layoffs in 2008 with an earlier period of prosperity. This research found that the layoffs made during bad economic times signaled poor investment performance. But when layoffs are made during prosperous economic times, they often lead to a positive market reaction.

With that research in mind, companies making layoffs during these undeniably tumultuous economic times might be in for rough times ahead. However, there is no sure-fire way to determine what will happen to a company’s stock price after it announces layoffs.

What’s happening to Microsoft’s stock?

Microsoft is known as a strong tech company. Many investors choose to keep this behemoth of a company in their portfolio. Regardless of the layoffs, it’s impossible to tell how Microsoft’s stock will fare in this volatile marketplace.

Microsoft has seen an uptick in its stock prices after the layoffs were announced. The stock price jumped from $228.53 on Friday, October 14 to $238.33 on Monday, October 17. MSFT closed at $250.66 yesterday, October 25.

Although Microsoft has seen a boost to its stock price, there is no telling whether or not this lift will last. It’s possible that investors will continue to be pleased by the impacts of the layoffs.

The tech industry is an interesting one for many investors. However, staying on top of the changing landscape of tech is often time consuming. In addition to following which companies are announcing layoffs, understanding which companies are developing the most exciting and innovative technology can start to feel like a second job.

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