Big Tech - The Turmoil Continues

We picked Amazon as one to watch for the year ahead, and they’ve started the year with more layoffs. Meanwhile, Apple is down to a $2 trillion market cap, losing a casual $1 trillion in valuation during 2022. UBS has downgraded their outlook for Microsoft.

So, more on Amazon and that profitability challenge. The cost-cutting continues. Back in November 2022, it was reported that the company would cut approximately 10,000 jobs. CEO Andy Jassy announced that this number would actually increase to approximately 18,000 jobs:

“This year’s review has been more difficult given the uncertain economy and that we’ve hired rapidly over the last several years. In November, we communicated the hard decision to eliminate a number of positions across our Devices and Books businesses, and also announced a voluntary reduction offer for some employees in our People, Experience, and Technology (PXT) organization. I also shared that we weren’t done with our annual planning process and that I expected there would be more role reductions in early 2023.”

“Today, I wanted to share the outcome of these further reviews, which is the difficult decision to eliminate additional roles. Between the reductions we made in November and the ones we’re sharing today, we plan to eliminate just over 18,000 roles. Several teams are impacted; however, the majority of role eliminations are in our Amazon Stores and PXT organizations.”

Further cuts were largely expected by the market. The stock closed slightly lower yesterday after the announcement.

JP Morgan analysts continue to rate Amazon shares as Overweight and think 2023 will see fortunes improve, even in a tough environment.

“We recognize the elevated cloud concerns and macro uncertainty over the next few months, but we believe there is still significant secular shift toward e-commerce & cloud ahead, and AMZN should also benefit from easing retail comps into 2023. Importantly, AMZN is focused on restoring higher profitability & FCF, with better fulfilment network throughput & headcount reductions.”

JP Morgan lowered the price target from $145 to $130 to reflect the uncertain, but maintain that “AMZN shares currently trade at ~8.9x our 2024E EBITDA, which we believe creates a compelling opportunity.”

Compelling indeed. The price target represents a 53% gain from yesterday’s close.

As for Microsoft, UBS sees problems ahead and downgrades the stock on "the back of a weaker round of field checks on the cloud providers, including Azure… Azure is entering a steep growth deceleration that could prove to be worse in FY23/FY24 than investors are modelling"

Microsoft shares reacted negatively to the news, closing lower by 4.37% on the day.

The slowdown in the global economy could really damage the growth outlook for cloud providers. Likewise, as companies reduce headcount, demand for software services such as Office (based on number of users) could weaken too.

Slower demand for PC’s was already affecting the sale of Windows software in the last earnings report. It’s a tough market right now. The macro uncertainty doesn’t look likely to dissipate any time soon either.