Feeling the Layoff Wave in Silicon Valley

I happened to be in Silicon Valley when Facebook and Twitter announced their mass layoffs — it felt like standing at the epicenter of an earthquake, and it hit closer to home because I personally know some of the people affected, all set against the backdrop of Tesla CEO Elon Musk's daily reality show of taking over Twitter. Tech companies employ so many people in the San Francisco Bay Area that they're practically the region's pillar industry. Even the owner of the restaurant where I grabbed a meal told me: "Thank goodness my son wasn't part of this round — he called to let me know he's fine…"

Faced With Shareholders Who Are Even Harder to Deal With, Companies Still Choose Layoffs

The main reason for this round of mass layoffs across tech and internet stocks is that valuations had climbed about as high as they could climb over the past few years. More than a decade of a sustained tech bull market pushed many companies to the point where investors stopped valuing them on P/E (price-to-earnings) ratios at all and switched to P/S (price-to-sales) instead. Once valuations get stretched that far, a correction is only a matter of time. On top of that, pretty much everyone on the planet who could get online via mobile and social networks already has — these companies are running into the hard limit of how many more people on Earth can actually be converted into new users.

During the pandemic, digital-transformation trends like moving to the cloud and adopting SaaS (software-as-a-service) all happened years ahead of schedule, letting tech companies pull forward revenue and stock gains they would otherwise have earned later. But that kind of hyper-growth rate was never sustainable in the long run. As the pandemic wound down, those "bonus" growth numbers reverted to "normal" growth — and the stocks reverted right along with them.

At "normal" stock valuations, all the "extra" headcount hired during the pandemic suddenly looked like "extra" cost. America is the world capital of shareholder activism, and since tech-company leadership gets a large share of its own compensation from stock, once the share price sours, shareholders come knocking demanding answers — and companies tend to respond with startling speed and aggression. Tech companies are asset-light: their production tools are basically just employees and desks, which is exactly why they can launch a massive layoff overnight. Handing everyone a cardboard box and telling them to clear their desk by the end of the afternoon looks terrifying from an employee's point of view, but it's still a very different order of magnitude from the irreversible damage of shutting down a traditional-industry factory and tearing out the machinery.

This has produced plenty of disputes — Twitter employees, for instance, have already filed a class-action lawsuit against Musk over the layoffs. But when the alternative is dealing with even harder-to-please shareholders, companies still choose the layoffs. The most famous of the activist shareholders is Carl Icahn, who repeatedly went after Dell, prompting a superstar CEO like Michael Dell to write an entire book, Play Nice But Win, about their clashes (the title alone makes clear Dell didn't think Icahn "played nice" at all). Activist shareholders genuinely make CEOs furious.

The last big wave of tech-and-internet layoffs was in 2008, and before that, 2000 — both produced sizable waves of job cuts. A lot of the next generation of founders tends to come directly out of the previous round's layoffs; that resilient ecosystem is exactly what makes Silicon Valley so formidable. This round has hurt Bay Area workers badly, but I don't think it does much lasting damage to Silicon Valley or the U.S. tech industry as a whole — if anything, amid today's various geopolitical risks, America's and Silicon Valley's advantages are being further reinforced. The companies on the layoff or hiring-freeze list — Salesforce, Twitter, Facebook — all still hold fairly dominant market positions with essentially no near-term competitors.

Some people like to argue that "young people don't use X or Y service anymore" — a claim that's somewhat misleading. The capital, talent, and user base commanded by the big tech-and-internet companies are simply too enormous to dislodge that easily. These companies have had it good for so long that there's still enormous room to trim costs. When Musk took over Twitter and moved to cut the free lunch program, employees argued each lunch only cost the company $20; Musk did the math and concluded the true all-in cost was closer to $400. Employees were collectively eating $13 million worth of free lunches a year — no wonder Musk hit his limit. There's obviously enormous room to improve operating efficiency here; there's still plenty of water left to wring out of that rag.

So with the momentum behind tech and internet stocks fading, and blockchain and crypto having fallen well out of fashion — made even worse by the collapse of crypto exchange FTX — what's actually trendy right now? So-called "deep tech" is back in vogue. "Deep tech" is a catch-all term that supposedly covers major, breakthrough-oriented technology, but the basket underneath it is a real grab bag: semiconductors, AI, materials science, robotics, space, all lumped together. The hottest subcategory right now is space technology, a trend that's been building since the privatization of the space industry, and that's recently accelerated largely because of geopolitical risk — the Russia-Ukraine war has already proven the practical value of low-earth-orbit satellites.

A Major Tech Reset? Silicon Valley Veterans Have Seen It All Before

My guess is that in roughly three to five years we'll see a wave of deep-tech IPOs. But deep-tech companies come with a different set of problems than tech-and-internet stocks. They tend to be black-box technologies with a much less obvious path to revenue — unlike internet companies, whose business logic is relatively transparent. Genuinely understanding a deep-tech company requires investors to do a great deal more homework.

Right now, entry-level labor is still in short supply across the U.S., even as tech companies are laying off en masse — but broader U.S. retail indicators haven't collapsed, and unemployment remains relatively low. That easing of underlying economic pressure is arguably one reason the Democrats' polling underperformance didn't translate into the electoral wipeout everyone expected. Ask any Silicon Valley old-timer and they'll shrug — they've seen this movie before, and some even think things are holding up fine. Tech-sector labor shortages have never really been a core driver of the broader U.S. labor market anyway. Tech and internet stocks will probably have a rough year or so ahead. But looking further out, I remain genuinely optimistic — most large tech and internet companies now have very clearly defined revenue models, and this round of adjustment should actually improve their operational health. After all, Silicon Valley and America's tech and internet stocks remain the center of the software world, and Marc Andreessen's line — "software is eating the world" — is still very much playing out. That said, individual company performance is going to vary enormously, and investors need to tread carefully.