After nearly a decade of six-figure salaries, cushy jobs and extravagant office perks, Silicon Valley firms are finally cutting back. Nearly 90,000 tech workers were laid off in 2022 alone. This year isn’t off to a great start either. In January alone, Amazon announced 18,000 job cuts, Microsoft confirmed plans to lay off 10,000 workers and Google said it’s cutting 12,000 jobs globally.
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And now, SEC filings show Microsoft is planning to lay off 10,000 employees by the end of the third quarter.
Things aren’t much better for those who have (so far) escaped the layoffs. Countless tech firms, private and public, have watched their valuation tumble over the past 12 months.
And now, the Financial Times reports that a number of panicked laid-off workers are “flooding secondary markets” with their shares of their former companies. Which means those valuations are likely to plunge even further.
Here’s what that might mean for your portfolio — and where you might want to turn.
Tech takes a tumble
Record-low interest rates over the past decade pushed more investors to seek out risky investments. Loss-making tech companies were, perhaps, the riskiest spot for this excess cash. Tech valuations soared since 2020, which allowed startups and tech giants to use their inflated stock as a way to retain talent.
Tech workers were paid excessive amounts of stock-based compensation. In fact, some companies like Snap and Pinterest paid up to 46% of their total compensation in the form of stock options. This boosted the total compensation of tech workers during the boom, but is now having the opposite effect as valuations plummet.
The Invesco QQQ Trust (NASDAQ:QQQ) — a fund that tracks tech stocks — is down 14% over the past 12 months. Meanwhile, private companies have also seen their valuation plummet as much as 80%. Employees of these firms are rushing to cash out on secondary markets, according to a recent report by the Financial Times.
Companies struggling to generate profits have been the biggest losers so far. An index of loss-making firms compiled by Morgan Staney is down 54% over the past year. Many of these money-losing firms have seen their valuations settle at pre-pandemic levels.
Looking ahead, some experts believe the valuations won’t recover until the Federal Reserve pivots on its interest rate strategy. Lower or steady interest rates could make risky tech stocks more attractive. However, that’s unlikely to happen until late 2023 at the earliest, according to interest rate swaps.
Until then, investors should probably focus on highly-profitable tech companies that have been unfairly punished during this crash.
Adobe (NASDAQ:ADBE) has lost 21% of its value over the past year. The company underperformed the broader market by a wide margin. However, its underlying business is still thriving.
The company reported $17.61 billion in revenue for fiscal year 2022 — 12% higher than the previous year. And in September, the company acquired design platform Figma, which expands Adobe’s suite of essential designer tools.
The company is also getting involved in the upcoming Artificial Intelligence boom by tracking the way its users use essential tools and integrating OpenAI’s tools with Figma.
The stock trades at a price-to-earnings ratio of 34.
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Microsoft (NASDAQ:MSFT) is also getting involved in the AI-boom. The company was an early investor in OpenAI and now has access to ChatGPT for its Bing search engine. The integration could be completed by early this year, which means the online search market is on the edge of disruption.
But none of this is reflected in the stock price. Microsoft has lost 12% of its value over the past year. It’s now trading at just 28 times net earnings per share.
The world’s most profitable tech company certainly deserves a mention on this list. Apple (NASDAQ:AAPL) delivered $6.11 in earnings per share in its fiscal Q4 — 9% higher than the year-ago period. This year, the company is expected to launch a new virtual reality headset and continue its supply-chain migration from China to India.
Apple stock trades at 25 times earnings, making it an ideal target for investors in 2023.