Dotcom Bust 2 has begun. Only bigger.
By Wolf Richter. This is the transcript of my podcast recorded last Sunday, THE WOLF STREET REPORT.
The plunge in so-called tech and social media stocks, especially of companies that are losing money and burning cash, has been spectacular. It started in February last year, with stock after stock getting taking down by 70%, 80%, and 90%, SPACs and recent IPOs in particular.
Then came the big names, like Netflix which is down 72% from its high, or Carvana, which despite the big bounce Thursday and Friday, is down 91% from its high.
The big ones are now talking about cost cuts, hiring freezes, and layoffs. Even the biggest tech and social media stocks, profitable companies with huge market caps, are suddenly talking about hiring freezes. A bunch of SPACs warned about running out of cash, and about their ability to keep operating as a going concern. Biotech startups are in a death spiral and are laying off people left and right.
Companies are adjusting to a new reality, where earnings and cash flows matter. Where expenses matter. And expenses, including compensation expenses, are exploding due to raging inflation.
Startups can no longer rely on investors to endlessly feed their cash-burn machines. And for them, raising money has suddenly gotten difficult. Investors have gotten skittish. The founders of these startups are being warned by venture capital partners to get with it, cut expenses, and start aiming for positive cash flows, or else.
So they’re trying to cut costs, or at least limit the explosion of costs, and they’re putting in place hiring freezes, and some layoffs, and they’re cutting back in all kinds of ways, marketing expenses, office expenses, and they’re putting some of their unneeded and vacant office space on the market, which is adding to the already historic glut of vacant office space.
The layoffs are relatively small and few for now. Labor shortages persist, and unemployment claims remain near historic lows, and laid off workers, thanks to the labor shortage and the 11 million job openings, are often picked up quickly by other employers. And many of these people already have a job lined up when they get laid off from the current job.
And even when a company lays off people in one division, it may continue to hire in its other divisions. And the hiring slowdowns, or hiring freezes, just reduce the huge spike of 11 million job openings. It’s not like there’s a flood of unemployed tech people roaming the streets.
But the whole thing has changed. Their stocks have come down hard, and suddenly expenses matter. And one company’s expense is another company’s revenues; or is an employee’s income. And that’s going to percolate from here to other companies, and to commercial real estate, and to housing.
The tech boom is off. And what is next – what already began in February last year, one stock after another – is the tech bust.
On May 26, it emerged that Microsoft, whose stock is down 22% from the high, imposed a hiring freeze on its core division. Executive VP who heads the group that develops its Windows operating system, its Office applications, and the Teams applications, well, he told employees in an email on Thursday that new hires for the software group would have to be approved by upper management. Which is effectively a hiring freeze for the group.
Microsoft said in a statement cited by Bloomberg, that “it is making sure the right resources are aligned to the right opportunity.”
Microsoft said that it would continue to hire, but it “will add additional focus to where those resources go.”
That’s the new cost consciousness. This is very different from the frenzied quest over the past couple of years, where tech companies fell all over each other trying to hire people away from each other.
Netflix, whose stock plunged 73% from the high, is laying off people. A few days ago, it emerged from a WARN filing with the State of California that it had laid off 106 people. Later reporting said that it had laid off 150 mostly US-based employees.
On May 24, it emerged that PayPal, whose stock also plunged 73% from the high, laid off dozens of employees from its offices in Chicago, Omaha, and Chandler, Arizona, to cut costs. And it emerged that it is planning to shut down its entire San Francisco office. San Francisco is still one of the most expensive places in the US to operate and staff an office. In a WARN filing with the state of California on May 17, PayPal announced plans to lay off 83 people in its headquarters in San Jose, California.
This is all about cost cutting. The layoffs are small compared to PayPal’s workforce, which had jumped by one-third amid the huge hiring binge over the past couple of years, to over 30,000 employees.
On May 24, it emerged that Lyft, whose stock collapsed by 80%, imposed a slowdown on hiring and is cutting budgets of some departments, the Wall Street Journal reported. It will leave some jobs unfilled, will fill only those that are critical, and will reprioritize projects to those with the most immediate impact.
On May 18, it emerged that Facebook, I mean Meta, whose stock plunged 49% from the high, had not only imposed a hiring freeze for certain engineering roles, but also for recruiters, and low-level data scientists. And it’s cutting investments in various products.
To soothe the rattled nerves of his employees, who’re fearing broad-based layoffs, CEO Zuckerberg told them in an internal all-hands meeting, that layoffs were not being planned, according to The Verge, which had obtained a recording of the meeting.
He said, “I can’t sit here and make a permanent ongoing promise that as things shift that we won’t have to reconsider that. But what I can tell you is that as of where we sit today, our expectation is not that we’re going to have to do that. And instead, basically what we’re doing is we’re dialing growth to the levels that we think are going to be manageable over time.”
On May 17, it emerged that crypto-exchange Coinbase, whose stock collapsed 83% from the high, imposed a hiring freeze for two weeks, and cut spending on cloud services, including Amazon’s AWS. Two days later, the Chief Product Officer at Coinbase sent out a series of tweets with more details.
On May 12, it emerged that Carvana, whose stock collapsed 91% from the high, laid off 2,500 employees, which is about 12% of its work force. It blamed a recession in the auto industry. The irony is that the company lost a ton of money every quarter, including during the hottest used car market ever, when retail prices spiked out the wazoo, and when dealers raked in massive profits.
The company is in an existential crisis, and it’s desperately trying to raise cash to fuel its cash burn machine for a while longer and to fund a misbegotten $2.2 billion acquisition it should have never done,
On May 9, Uber, whose stock plunged 64% from the high, made waves with its hiring freeze and cost cutting plans. Its CEO told employees in an email, obtained by CNBC, that the company would “treat hiring as a privilege and be deliberate about when and where we add headcount.” He said Uber needed to focus on profitability. No kidding. The company has been around for over a decade, and still loses a ton of money, including $5.5 billion in Q1.
He said, “It’s clear that the market is experiencing a seismic shift, and we need to react accordingly.”
He said that Uber would be, quote, “even more hardcore about costs across the board.” So the company will cut spending, including on marketing and incentive spending.
On April 26, online broker Robinhood, whose stock collapsed by 88% from the high, announced that it would lay off 9% of its full-time workforce. The company had about 3,400 full-time employees at the beginning of the year.
These are some of the biggest names. There are lots of companies that are now trying to cut costs in order to get profitable, or to remain profitable, or in order to just remain alive.
There have been dozens of bio tech companies that have laid off people in recent months, usually when phase II or phase III clinical trials for new drugs didn’t produce the desired results. That’s a common event with biotech startups. But there was such a boom in biotech startups in recent years whose products are now running into walls, and so there is this flood of failures. Investors’ willingness, nay eagerness to throw money at biotechs, encouraged the boom, and now the money is running out, and the results are lousy, and the sector is in a death spiral.
All these companies are suddenly having second thoughts about hiring willy-nilly whoever they can grab and throwing piles of money, which was free, at everything.
For now, this isn’t going to create unemployment because, number one, most of these actions are hiring freezes, not mass-layoffs; and number two because there are still a huge number of open jobs out there, and most laid-off workers get hired quickly, and we see this in the weekly unemployment claims that have remained near record lows.
But it will take pressure off the labor market, and we should see the huge historic number of job openings, those 11 million job openings, come down.
What the plunging tech stocks, SPACs, and recent IPOs, the hiring freezes, and the layoffs show is that this ridiculous boom amid the most overstimulated economy ever has turned into a bust, now that the Fed is beginning, and I mean, it’s just beginning, to take away the punch bowl.
It will take many years to work through this hangover from the money-printing binge. Many of the SPACs and recent IPOs and bunch of other companies will either shut down and their stocks will go to zero, or they get bought for cents on the dollar.
During the dotcom bust, the Nasdaq plunged 78% over two years, with a huge rally in between, that drew in more people that then got wiped out. Many companies shut down and disappeared, and their stocks went to zero. That’s the kind of scenario I see now for the current mess.
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