Slumping stock prices and slowing growth has the biggest technology companies — and investors — thinking about what it will take to reverse their fortunes. Finding new, lucrative sources of growth is the preferred way out, but it's hard to find opportunities big enough to move the needle when your revenues are already in the tens or hundreds of billions of dollars per year.
That makes cost cuts the most obvious way to boost profit, an uncomfortable option for an industry that hasn't had a major belt-tightening phase in 20 years. After investors showed their displeasure with the lack of cost control demonstrated by tech companies in the third quarter, it appears that management teams have had a change of heart. In the past two weeks both Facebook parent Meta Platforms Inc. and Amazon Inc. have begun laying off staff, with plans for about 10,000 job cuts each in various departments. Earlier this week a large investor in Alphabet Inc. wrote to that company pushing for meaningful cost cuts there as well. (Elon Musk cut about half the workforce at Twitter Inc. after his takeover, but that's a different story.)
Investors are particularly irritated about what one might call the "science projects" that many big tech companies have been pursuing, eating up billions in capital without contributing much in revenue. Examples of this include Amazon's spending on side projects like Alexa, which is believed to account for more than $5 billion in annual losses, and Alphabet's investments into its self-driving vehicles unit, which has piled up $20 billion in losses so far. At Meta, Mark Zuckerberg staked the whole company's future on the development of new virtual and augmented reality products, renaming the company to steer its identity away from its core social-media business. Meta's Reality Labs unit has lost almost $10 billion so far in 2022. Zuckerberg apologized for increasing investment too much, too soon as he announced the job cuts.
To be fair, in the late 2010s when interest rates and inflation were low and tech stocks commanded loftier valuations, these moonshot-type investments made more sense. Investors were valuing tech companies more for growth than profitability. At one point, Alphabet's self-driving division was seen as being worth $175 billion, suggesting that these large-scale non-core divisions being incubated within the larger companies might pay off. Profit margins in core businesses were generally stable or expanding at a time when revenue growth was strong, suggesting nearly limitless resources to pursue any ideas that could potentially one day become as big and profitable as Google Search, YouTube, Facebook, Instagram, or Amazon Web Services.
