What Microsoft’s Recent Layoffs Mean For The Company And Investors

Key takeaways

• Microsoft announced 10,000 layoffs on January 18, 2023
• These layoffs come amid a string of similar announcements from other tech businesses
• In his announcement, CEO Satya Nadella noted that the company will refocus on “secular growth and long-term competitiveness”

Microsoft is the latest company to announce a large round of layoffs, cutting 10,000 jobs on Wednesday. The company is facing slower PC and cloud sales, which could be one of the reasons behind the cuts.

Are these layoffs signs of future struggles for the business or just a proactive step to reduce costs now that people fear an oncoming recession?

Here’s what you should know, and how Q.ai can help investors (and, in this case, tech investors) amidst mass tech layoffs.

Background

Microsoft is one of the largest tech companies in the world, responsible for the Windows operating system, office software, cloud services, gaming and more.

In recent weeks, tech companies have seen significant layoffs. Amazon recently laid off 18,000 employees, while Facebook and Instagram owner Meta cut 11,000 jobs.

These layoffs come after all three businesses added to their payrolls during the pandemic years. Between June 2021 and 2022, Microsoft added more than 40,000 people to its payroll.

There are many reasons that tech companies have been forced to make cuts, including rising interest rates. Technology companies are often viewed as volatile and reliant on borrowed money or other influxes of capital. Some, like Uber, have yet to turn a significant profit at all.

With rates rising, investors have more appealing options that are less risky than tech firms.

Experts also believe that tech companies over-expanded during the pandemic as people became more reliant on technology to accomplish tasks. As pandemic fears have receded and businesses reopened, tech payrolls are higher than they need to be to keep operations running.

Microsoft layoffs

On Wednesday, Microsoft CEO Satya Nadella announced the layoff of 10,000 employees. He also published a memo titled “Focusing on our short- and long-term opportunity.”

In the memo, Nadella first discussed the turbulent economic times the world is experiencing and referenced the birth of the next major wave of computing as artificial intelligence (AI) continues to advance. When announcing the layoffs, the memo also stated, “while we are eliminating roles in some areas, we will continue to hire in key strategic areas.”

As part of the layoffs, the company is taking a $1.2 billion charge related to severance costs, changing its hardware portfolio, and consolidating its leases. Impacted employees are receiving packages that include “above-market severance pay, continuing healthcare coverage for six months, continued vesting of stock awards for six months, career transition services, and 60 days’ notice before termination, regardless of whether such notice is legally required.”

He ended the memo by saying, “the start of 2023, it’s showtime – for our industry and for Microsoft. As a company, our success must be aligned to the world’s success.”

Investors likely saw signs of financial trouble for Microsoft before the layoffs. PC sales have fallen as laptop sales rise, and Microsoft’s HoloLens, an augmented reality device, has fared poorly enough that the company chose to bury revenues from the product under the “devices” line item on its earnings report.

That same earnings report saw a small 2% increase in device sales, but Microsoft warned that device revenue could drop as much as 30% by the next earnings report. It similarly forecasted a 30% drop in Windows-related revenue.

The company has also cut hardware development and releases, scrapping plans for products like the Surface Duo 3 and not announcing any upgrades to its new Surface Hub 2S.

Looking ahead

In his memo, Nadella said that the company would “continue to invest in strategic areas for our future, meaning we are allocating both our capital and talent to areas of secular growth and long-term competitiveness for the company, while divesting in other areas.”

Moving forward, Microsoft will look to focus its resources on areas of growth while reducing its investments in other areas. Cutting back on investments in things like the HoloLens and office-based hardware like the Surface Hub are two components of this.

Though cloud growth has slowed as the pandemic has receded, the cloud is likely to remain an area of focus and growth for Microsoft as consumers purchase fewer devices and companies hesitate to invest in their computer equipment amidst high inflation and interest rates.

Microsoft is due to release an earnings report next week. This will likely contain more details about its future plans, including adjustments to its hardware and cloud strategies, giving investors a clearer idea of where the company will be headed.

What it means for investors

Microsoft’s stock price fell after the announcement, following the market’s downward trend for the day. This isn’t surprising since the day saw many companies lose value. Plus, Microsoft admitted that the layoffs would cost the business about $1.2 billion in severance and other costs.

The question that investors need to consider is where Microsoft goes from here. Cutting 10,000 jobs, equal to about 5% of its workforce, gives Microsoft significant savings on wages and benefits. If it succeeds at cutting staff that work on less profitable products and focusing its efforts on areas of growth, this could be a strong purchase opportunity for investors.

On the other hand, this could be the first sign of a continued downward trend for the company. Though many tech firms have reduced their headcount recently, major competitor Apple has yet to announce layoffs. Microsoft also faces stiff competition in areas like cloud technology, which could be challenging to overcome.

If you’re having trouble deciding on the best way to invest, consider working with Q.ai. Its artificial intelligence can help invest toward any goal and in any kind of economy. With Investment Kits, like the Emerging Tech Kit, investing can be simple and fun.

The bottom line

Microsoft’s job cuts are the latest in a slew of layoff announcements. Investors will be watching the company closely to see if it can refocus its efforts on more profitable technologies and products.

Download Q.ai today for access to AI-powered investment strategies.