Big tech gets leaner
For the first time in years the big news out of Silicon Valley concerns large scale layoffs. Layoffs normally result from falling sales or profits, but that’s not currently the case in most large technology companies. Sales are up and so are profits, just not as much as they enjoyed in the last few years.
The following chart shows that these layoffs only reverse part of massive expansion in payrolls, mostly during the Pandemic years. But why might this be good news?
Businesses need to satisfy three different groups of people to be highly successful: 1) Customers, 2) Employees, and 3) Shareholders/Owners. This list also ranks each group by their importance to the business. Without customers there is no business and without employees, customers can’t get the product or service they want.
Strangely, group 3 can be abused and the business can continue operating. For example, in the last 50 years the stock of US Steel Corporation is up a measly 24%. That compares to a 3,000% gain for the Dow Jones Industrial Average. And yet customers continue to get steel and employees still have jobs.
Our job at Dock Street is to make sure we only invest in businesses that treat shareholders at least as well as they treat customers and employees. Really wonderful businesses make all three groups happy.
A careful reader will have noticed a certain tension between employees and shareholders. There are industries where talented employees are so rare and expensive that there’s not much left for shareholders to enjoy. Think about the movie business and video games.
So the current tech layoff announcements are good news for shareholders. These employees are leaving the least strategic parts of the business. Lower expenses leave more room for profits and this will also focus management attention on the most productive and important activities in the business.
(We acknowledge that it is clearly bad news for those getting laid off, but here we must confine ourselves to the investor perspective.)
Again, if these were the layoffs that characterized the industrial age, then it would indicate real problems for these companies. But in a massively profitable industry, management can be distracted by the “next big thing” instead of focusing on the activities that actually increase the economic value of the business. Shareholders should welcome this news.
Daniel A. Ogden