Tech Tipped The Scales

Firms from Meta to Disney have been ditching their “growth at all costs” ethos and putting a sharper focus on the bottom line. It’s now been six months since Meta announced an initial 11,000 job cuts that inspired similar ax-swinging elsewhere, so it seems like a good time to take stock of how it’s all going.

🕰 Recap

• Meta was the first to show off Big Tech’s sleek new look last November when the firm shifted focus from metaverse sales to real-world profit dollars. Read our story
• Media firms followed suit, and Netflix became the first streamer to announce its own streamlining plans. Read our story
• On Wednesday, Disney’s results offered a chance for investors to see how the firm’s newly styled profit focus is faring. Read our story

✍️ Connecting The Dots

By the time Meta declared 2023 as a “year of efficiency”, shareholders had made their views on the firm’s costly pursuit of the metaverse perfectly clear. To a degree, then, the Facebook parent’s switch from cash-burning expansion to a leaner and meaner profit focus was somewhat forced. But Meta’s resulting stock price resurgence wasn’t lost on other Big Tech firms who, faced with economy-driven slowdowns, followed suit with layoffs of their own. And the trend spread beyond tech: media firms Netflix and Disney – coming to terms with the streaming market’s maturity – decided it was time to go on a diet too.

Six months in, then, how’s all this newfound discipline going? Well, you’d have to say so far so good. For firms that had obviously seen growth hit the skids – namely Meta and Netflix – the profitability focus has been cheered to the rafters: Meta’s stock is up 170% and Netflix’s 100% from their respective lows. And even where growth problems were less obvious – at Microsoft, Amazon, and Alphabet – investors have reacted positively to the new cost-consciousness. All those firms’ stocks are up much more than the S&P 500 this year.

But let’s face it, with the exception of Microsoft, the stock prices of those once high-flying growth firms are still a long way from their past highs. And it comes down to one thing – revenue growth. See cost-cutting’s fine, but you can only expand profit in the long run by growing sales. That’s why the price gap to previous highs for those firms tallies directly with their future growth prospects. Take Microsoft. Its stock sits less than 10% from its all-time highs because it has artificial intelligence’s (AI’s) wind in its sails. Disney, though, is still 50% below its previous high. And it’s no wonder, given investors have no idea what the firm’s future growth looks like. So the message for investors is clear: yes, cost-cutting’s great and all, but until those companies pick up their growth pace, it’s probably too early to celebrate.

🥡 Takeaways

1. Out in front.

One of the reasons why Microsoft’s been doing so well this year is increased confidence that once the current economic slowdown has passed, growth – boosted by AI – will ramp up again. Throw some cost discipline into the mix after a slimming year, and you have accelerating revenue, off a lower cost base. That’s a recipe for much better profit growth. In fact, analysts currently expect that after slower expansion this year, Microsoft’s profit growth will rebound to an alluring 15% for the next two years. Let’s hope they’re right.

2. Past glories.

Figuring out how fat Big Tech’s profit margins can get is no easy task. Those firms spent many years gobbling up college grads and paying them a pretty penny, and no one really knows how many of those might be surplus to requirements. But one option is to look at previous profit performance. With the exception of Microsoft, all the tech giants’ margins are well below their best. Meta’s margin is 23 percentage points below its 2010 high, Google parent Alphabet’s is 16 percentage points below its 2002 peak, and Amazon’s 2.3% margin from last year is less than half of what it was in 2020. Now, it’s not as simple as assuming that these behemoths can return to those levels of profitability – they’re all very different beasts today. But you can bet that inside their board rooms those prior highs will be a loose ambition, at the very least.

🎯 Also On Our Radar

US inflation continues to blow cooler, with consumer prices rising just 4.9% in April – the lowest in two years. The fading inflation pressures in the US stand in stark contrast to the UK, where the central bank chief made a dramatic confession this week: Britain’s inflation isn’t likely to come down to the bank’s target of 2% until 2025. That’s some admission, given it was supposed to get there by the end of this summer.