Silicon Valley Confronts the End of Growth. It’s a New Era for Tech Stocks.

The only strategy that works is to remove people. Tech CEOs are suddenly channeling Marie Kondo, only considering people and projects that “spark happiness” or at least support decent operating margins. Layoffs.fyi reports that tech companies are laying off over 122,000 people already this year.

Mark Zuckerberg, CEO of Meta Platforms (ticker: META), declared on a recent earnings call that this is “the year of efficiency.” He used the word “efficiency” (which itself sounds inefficient, but never mind) over 90 times. By efficiency, he means layoffs and cost cutting. Turns out, that’s exactly what Wall Street wants from a company that appears to have stopped growing.

This past week brought fresh evidence that cleaning house is the right strategy for 2023. Zoom Video Communications (ZM) rallied after its earnings report, which was followed by a 15% reduction in headcount. Zoom, which posted three straight quarters with growth north of 355% in the midst of the pandemic, expects revenue to grow by 1% in the January 2024 fiscal year. But profits will improve, thanks to all those former employees who can now video-chat on FaceTime or WebEx.

We learned on Wednesday that Marc Benioff, CEO of Salesforce (CRM), is also an efficiency expert. Salesforce reported better-than-expected earnings, and their guidance for the January 2024 fiscal year had a much higher operating margin than the Street was expecting. The company credited 8,000 January layoffs – about 10% of its workforce. Mahalo!

On Salesforce’s earnings call, a strangely enthusiastic Benioff spoke of the need to press the “hyperspace button” to accelerate the company’s profitability goals. (He used the phrase “hyperspace button” four times on the call.) Apparently, when you press the hyperspace button, 10% of your crew are ejected backwards into deep space; This is what drives you forward. He also said that Salesforce is “reigning our performance culture,” perhaps a good way to warn staff members that if the company doesn’t hit margin goals, it may hit the hyperspace button again. You know what happens then.

The reason for this sudden preference for profitability and efficiency over growth is quite clear – there isn’t a lot of growth. We may not be in a recession, but last week’s earnings reports from enterprise computing companies made it clear that their customers want to do more with less. Dell Technoliges (DELL), HP (HPQ), Pure Storage (PSTG), Box (BOX), Workday (WDAY), and Snowflake (SNOW) all reported disappointing results for the year, citing customer caution and long purchase-approval cycles. perspective provided.

Snowflake CEO Frank Slottman said his company “saw a measure of booking frugality with certain customer segments.” Box boss Aaron Levy told Baron’s The deal size has been hit by customer concerns about the outlook. Charlie Giancarlo, CEO of Pure Storage, said customers are reevaluating budgets in light of economic conditions. Gary Steele, head of Splunk (SPLK), says customers are hesitating on new deals because they focus on cost control.

The biggest technology has stopped growing. In the fourth quarter, Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Meta, and Amazon.com (AMZN) collectively rose 1% each. HP, whose name stems from Silicon Valley veterans William Hewlett and David Packard, the original two people in a garage, reported that sales fell 19% in its latest quarter as the PC market remains in a post-Covid turmoil . Dell reported an 11% drop in revenue — actually slightly better than expected — but warned that things will get worse before they get better.

Salesforce, at HyperSpace Button Ready, delivered January-quarter earnings that crushed Street estimates. But its development story is getting tarnished. It sees revenue rising 10% this year, the smallest annual amount ever.

The development drought is widespread. PC demand, which had grown exponentially during the pandemic, has crashed. The smartphone market has matured. So are wireless services and the streaming-video market. Chip makers are reducing production. intel‘S
(INTC) revenue was down 32% in the latest quarter. Memory chip maker Micron Technology (MU) saw a 47% drop in sales in the November quarter; For the February quarter, the decline would assume 50%. Cloud-computing demand is still growing, but at a slower pace. Both Amazon and Microsoft say they are helping customers “optimize” their cloud spending.

At the same time, tech CEOs have picked up pace to hand out cash back to shareholders through stock repurchases. (After all, free cash from the layoffs.) Meta announced a new $40 billion buyback program, bringing its total authorizations to more than $50 billion, or more than 10% of its market value. Salesforce, which just a few months ago unveiled a $10 billion buyback program—its first—increased it to $20 billion last week.

The companies seem unfazed by the Biden administration’s threat to quadruple the tax on stock repurchases from 1% to 4%. In any other year, companies like Meta and Salesforce would be happy to use the excess cash to shop around for acquisitions, but administrations don’t like that either.

Tapping the Hyperspace button, Benioff shocks the company’s mergers and acquisitions committee, which has been officially disbanded. That’s a huge statement from a company that has spent more than $50 billion in recent years to buy Slack, Mulesoft, Tableau and others. Analysts think Benioff has an itchy trigger finger, but five different activist investors holding positions and demanding that he keep the you-know-what button off put him in front of him. Must play cards.

On the other hand, it is now much easier to back away from M&A, given that the outlook for tech deals is grim under President Biden and the merger-hating leaders of the Federal Trade Commission and Justice Department. While the FTC eventually gave up trying to block Meta from buying within a smaller Metaverse software company, regulatory concerns remain over a handful of pending deals, including Microsoft’s proposed acquisition of Activision Blizzard (ATVI) and Roomba vacuum maker iRobot. Amazon’s deal for is included. IRBT).

Worsening matters, the IPO market remains closed, so venture backed start-ups have no viable exit strategy. Venture-capital-backed firms raised $32.4 billion in the fourth quarter of 2022, down 14% from third quarter totals. And venture firms themselves have dramatically slowed their search for new money. Ernst & Young says they raised just $7.1 billion in the fourth quarter of 2022, compared to $157.6 billion in the first nine months of the year.

Malcolm Harris delivers a controversial analysis of technology in his pointed 708-page tome Palo Alto: A History of California, Capitalism and the World, Harris grew up in Palo Alto, graduating from Palo Alto High School a few years before my oldest child. He recalls one day in fourth grade when a substitute teacher at Ohlone Elementary School (named after the Native American tribe that once lived here) told his class that they were living in a bubble, telling some 10-year-olds Did not get it. The parents complained, and everyone was fired, but the lesson stuck with little Malcolm, who is still certain that Palo Altoans live in a bubble. As a 25 year old resident, I can’t say he’s wrong.

Harris’ book covers vast areas from the Gold Rush to the founding of Stanford University to the Theranos scandal and other recent events. A Marxist, he thinks the place has been tainted by unbridled greed since its inception. In a recent interview, he called it an “efficiency built city”.

Harris also argues that the best thing for Stanford would be to close, or relocate, at least some of its 8,800-acre campus and give the roughly $37 billion endowment to the Muwekma Ohlone Band Give.

Talk about pressing the hyperspace button!