Why Are Tech Companies Laying Off So Many Workers?

Key Takeaways

• Layoffs have been sweeping the tech sector, including big names like Meta, Amazon, Shopify and Netflix.
• The widespread downsizing has been driven by a hiring spree during the pandemic lockdowns and the concerning economic headwinds ahead.
• For investors, it means that investing in tech has become more difficult than it used to be.
• Luckily, with the power of AI you can still find diamonds on the rough and the companies best positioned to hold up well if a recession does hit.

Every week seems to bring a new round of layoffs in the tech sector. It started earlier in the year with smaller, growth companies who need to keep a close eye on their ongoing spend, and has now extended to the behemoths of the industry like Meta and Amazon.

Just this week it’s been reported that Amazon is planning to lay off a massive 10,000 employees. This comes off the back of Meta letting go 11,000 workers last week and Elon Musk running a continuous revolving door over at Twitter.

It would probably be quicker to list the companies that haven’t laid off workers this year, but the ones that have include many other big names like Uber, Airbnb, Zillow, Coinbase, Netflix, Spotify, Peloton, Shopify, Stripe and Robinhood.

The stream of sackings has even spawned a website which tracks layoffs across the sector.

But why is this happening? Why are so many companies in the tech sector, even ones still generating big profits, laying off so many people?

The reasons are obviously going to be specific to each individual company, but there are a couple of big themes that are impacting Silicon Valley and beyond.

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The pandemic hiring frenzy

In many ways, this major round of layoffs is fixing a previous mistake. During the pandemic years, our online lives became our only lives. There was no commuting to the office, no bars on Saturday nights and no pickup basketball or dance recitals.

We were all forced to stay home and we spent a lot more time online. Online shopping became not just a growing retail outlet but the only retail outlet. Netflix, Amazon Prime and the other myriad streaming services took the places of not just the cinema but also nights out at restaurants, work day lunch breaks and date nights.

Despite the global turmoil, this upsurge in online activity led to a boon for tech companies. They pulled in record levels of revenue, which created record profits and fueled a hiring frenzy that drove big salaries and benefits for engineers, developers and other tech workers.

Many tech companies believed that this was the beginning of a new normal. With almost every office worker in the world shifting to working from home, there was a massive change in the way we lived our lives.

Because they expected this shift to become permanent, tech companies hired accordingly. They expanded their teams, created new ones and generally grew very fast. This was heightened by the fact that large companies require built in redundancy.

If a team at Meta requires 25 staff members to keep the application they work on running and stable, that team is likely to need 30 or more actual employees. Not because there is enough work for 30 engineers to do on a daily basis, but to provide protection to the company in the event of a number of key staff leaving.

It’s a common situation in the tech industry, and it likely meant that many of these companies hired even more workers than they thought would need for a sustained level of higher usage.

Since the world has returned back to (pretty much) normal, it’s clear that the vision of the future from CEO’s like Mark Zuckerberg and Brian Armstrong (of Coinbase) wasn’t quite on the money.

The post-Covid reality

Yes, working from home has become a much more accepted practice. Many office workers now enjoy the benefits of working from home as part of their permanent employment arrangements.

But hybrid work has also become much more popular. Many workers (and employers) want some time in the office to collaborate, share ideas and build a company culture.

While technology like Zoom and Google Meet are still seeing widespread use, we’re past the old days of having every single meeting automatically held online.

Outside of work, the situation is even more stark. In many ways, life away from the office is almost exactly how it was before the pandemic. Bars and restaurants are full again, weekend sports have resumed and vacations are back

In many cases, people are even more interested in these things after two long years of abstinence.

The end result? Tech companies hired too many people. And these aren’t casual admin staff earning $10 an hour, these are highly experienced software engineers and developers earning low to mid six figure incomes.

Not to mention the generous benefits, facilities and even stock options that are included as part of the package. Some level of overstaffing for redundancy is necessary, but it’s clear that in many companies, it’s gone too far.

The economic situation and a potential recession

Now this situation wouldn’t necessarily be a major concern if the growth prospects were healthy in tech. Hiring too many people isn’t a problem if you’ve simply hired them a little too early.

Sure, it’s not ideal, but if you expect to be hiring for those positions in 6 to 12 months anyway, having them on the books a year early isn’t going to break the bank for companies like Meta or Alphabet.

The issue is that the short term future isn’t looking too rosy. We’ve been hearing for months now that the US is apparently heading into a recession. Coinbase CEO Brian Armstrong was one of the earliest to call it out, with Elon Musk, Zuckerberg, Jeff Bezos and many others following suit in recent months.

A recession would mean lower consumer spending and, most importantly for many tech firms, lower advertising spending. At the recent Q3 earnings call, Meta mentioned this specifically, stating that they expected Q4 and early 2023 advertising revenue to be softer than it has been.

With these headwinds on the horizon, tech companies need to reign in their spending to ensure they get through the volatile period safely.

What do the tech layoffs mean for investors?

So how has the market reacted to all this news of layoffs? Well in the case of Meta and Amazon, actually rather well.

See there is a big difference between laying off staff over concerns of keeping the business afloat, and laying off staff to tighten the belt and keep the shareholders happy. For the biggest companies, a big payroll doesn’t cause concern over whether the company will survive, but simply how much profit they’ll make.

For startups or growth phase companies, large layoffs could be a sign that the company itself is in trouble. Examples that lean more towards that end of the spectrum include companies like Peloton or Groupon.

It means that navigating tech investment has become more challenging than ever. It’s hard to tell which companies are downsizing as part of the normal business cycle and which ones are facing fundamental challenges to their business.

We can help with that. At Q.ai we use the power of AI and machine learning to help predict how investments might perform, and then automatically rebalance our portfolios in line with the AI’s projections.

In the Emerging Tech Kit, our AI looks at four tech verticals, as well as a wide universe within each of these. To start with, the AI projects and balances the Kit across the four verticals, tech ETFs, large cap tech stocks, growth tech stocks and cryptocurrencies via public trusts.

Then our AI allocates to various securities and ETFs within each of these verticals. This process is done every week, to ensure our Kits are as up to date as possible.

It’s like having a hedge fund right in your pocket.

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