Tesla, Coinbase, And More Tech Companies Are Stripping Themselves For Parts

Tesla, Coinbase, And More Tech Companies Are Stripping Themselves For Parts
Stéphane Renevier, CFA

over 1 year ago2 mins

Mentioned in story

Tech companies have been going through the wars lately, squeezed by aggressive interest rate hikes that are reducing the value of their future profits. That’s now led to a host of layoffs in the sector: the past two months alone have seen around 100 tech companies – including Tesla, Coinbase, and IBM – lay off tens of thousands of workers between them. It’s a far cry from a few months ago, when they were building out their teams at the rate of knots.

It goes without saying that this is tough to take if you’re one of the people who’s been let go (might we suggest you join us instead?). But it’s also worrying for you as an investor. Fewer employees tends to cause a company’s revenue growth to slow and, eventually, its profit margin to narrow. This could come as a rude awakening to investors, who are widely expecting company profits to keep growing in the next few months. And as Reda has pointed out, that expectation is pretty much the only thing keeping the stock market from crashing right now.

It’s also important to zoom out here: these workers will now be forced to tighten their belts and spend less, which means restaurants, retailers, airlines – you name it – will all make less money. That puts pressure on those companies to reduce costs, which could result in even more layoffs. Keep in mind too that these tech companies are no longer just talking about a deteriorating economic outlook: they’re actually taking growth-impacting measures to protect themselves. That suggests they think a recession is far more likely than not to happen.

Of course, this could all change if the Federal Reserve manages to bring inflation down: the central bank might then decide to reverse course on their rate hikes, and tech companies could come back swinging. But until there’s more evidence that the Fed’s having real success, you should continue to brace yourself. Holding some cash, high-quality stocks in defensive sectors, and maybe even some US government bonds could help you meet the moment.

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