How Will Mass Layoffs Affect Salesforce and Amazon?

Cloud-based software company Salesforce (NYSE:CRM) and e-commerce giant Amazon (NASDAQ:AMZN) have one thing in common. Last week, both companies announced layoffs and have gained back investors’ interest driven by hopes of better margins in the future. Cost-control initiatives, indeed, are the need of the hour for these tech companies that can foresee revenue growth dipping further in the coming months.

The layoffs of the tech industry that began in 2022 are continuing in 2023. The pandemic boom has subsided, and the economic downturn hints at even lower revenues in the coming quarters. In these uncertain times, however, layoffs can be a good thing. Let’s take a deeper look at CRM and AMZN.

Once an outperformer during the pandemic, CRM stock has come full circle, now trading near pre-pandemic levels.

Citing a challenging macro environment and an inherent business slowdown, Salesforce resorted to 8,000 job cuts on January 4 (10% of its employees). Further, the company’s restructuring plan aims at cutting costs further and improving margins via a reduction in office space and selling of real estate.

In a letter to its employees, Salesforce’s CEO Marc Benioff said, “As our revenue accelerated through the pandemic, we hired too many people leading into this economic downturn we’re now facing, and I take responsibility for that.”

For reference, Salesforce’s employee count stood at around 80,000 people at the end of October 2022. That is almost double its pre-pandemic employee count of 48,000 three years ago.

The company expects to incur costs to the tune of $1.4 billion to $2.1 billion related to the cost-cutting measures. Out of that,  $800 million – $1 billion will be incurred in its Fiscal Q4 quarter, while $1.2 billion – $1.7 billion will be reported in the future.

The company refrained from giving any long-term cost savings outlook arising from the restructuring plan. Looking at Salesforce’s income statement, SG&A comprises a major chunk of operating costs. The job cuts, therefore, should certainly boost its margins, going forward.

Meanwhile, Salesforce revenue growth has witnessed a disappointing slowdown, registering its lowest growth in years at 14% in Q3. The company expects that number to come down further in its upcoming Q4 results, expected to release on February 28.

There are other issues facing the company, too, including the resignation of top executives. Co-CEO Bret Taylor stepped down from his position recently. Further, Slack’s CEO, Stewart Butterfield, also left the company (Slack was acquired by Salesforce in 2020).

Longer term, the company aims to reach adjusted operating margins of 25% by FY2026 on the back of revenues of $50 billion. Given the current recessionary scenario, both targets look difficult to meet. Having said that, the restructuring initiatives, if successfully implemented, may move the company closer to its goals.

Is CRM Stock a Strong Buy, According to Analysts?

CRM stock commands a Strong Buy rating on Wall Street based on 27 Buys and eight Holds. Salesforce’s average price forecast of $193.45 implies 31.2% upside potential.

Amazon had a very tough 2022. In fact, it broke a record, as it was the first listed company ever to lose over $1 trillion worth of valuation. Last week, Amazon announced its biggest job cuts ever, as it plans to let go of 18,000 workers. This represents around 6% of its total workforce.

CEO Andy Jassy indicated that most of the layoffs will come from the company’s e-commerce and human resources divisions. Positively, this could mean that Amazon’s growth engine, AWS, may not be impacted much by the job cuts.

Looking back, COVID-19 winner Amazon multiplied its logistics networks worldwide and also significantly expanded its workforce to tap the enormous uproar in demand for online merchandise during the lockdowns.

With things now back to normal, the abnormal demand subsided. On top of that, revenue growth and profitability took a further hit from rising interest rates, inflation, and subsequent consumer spending cuts in 2022. In such a scenario, the job cuts will help the company control its costs amid declining revenue expectations.

Notably, while e-commerce revenues have dipped, Amazon’s key growth engine, AWS, remains resilient. AWS’s leadership position in the cloud infrastructure space is undeniable and presents a robust growth outlook for years to come.

Is Amazon a Buy, According to Analysts?

Despite the massive stock price losses in 2022, the Wall Street community continues to be optimistic about Amazon stock. Overall, the stock commands a Strong Buy consensus rating based on 36 Buys and three Holds. Amazon’s average price target of $137.50 implies 53% upside potential from current levels.

The Takeaway

Amazon and Salesforce have strong potential to grow in the long run, given their dominance. However, in the short term, both companies can remain range bound as they continue with cost-cutting initiatives to combat a slowdown.