Tech Giants Bet on Cost Cutting Initiatives and Emerging Tech for Thriving in a Challenging Economy

Big tech companies like Amazon, Meta, and Google are fortifying their defenses against an impending global economic slowdown by doubling down on innovation and shifting focus to more profitable business units. In the face of uncertainty and declining earnings, these tech giants are betting on new and emerging technologies to maintain their dominance in an industry that has not been immune to the far-reaching effects of the recession.

On October 2022, the IMF predicted that after peaking at 6% in 2021, global growth would decline to 3.2 percent in 2022 and 2.7 percent in 2023 – the weakest growth profile since 2001 aside from the global financial crisis and the COVID-19 pandemic's severe phase.

According to a World Bank Report, the growth outlook for 2023 suggests a potential recession, and if this forecast turns out to be accurate, behind the recessions of 2009 and 2020, it would be "the third weakest pace of growth in nearly three decades."

The Impact on the Tech Industry

The year 2022 was officially declared a tough year for Silicon valley by JP Morgan after big tech lost a combined $2.5 trillion during the second quarter of the year, Amazon's pandemic slump persisted, Apple's revenue increased marginally, but profits decreased, and Meta reported its first-ever quarterly revenue decline.

The same year, Alphabet's profits fell for the first time since the company started revealing its YouTube ad revenues to the public, falling by almost 30% to $13.9 billion, and as sales of its Xbox video game business fell, Microsoft reported that it anticipated that demand for its PC and cloud computing technology would continue to decline as business customers cut back. Eventually, the company's stock experienced its largest intraday decline since March 2020.

This year, the turmoil continues with news of layoffs in the tech sector; no sector seems to be immune, and no specific size of business is excluded. Employers ranging from billion-dollar public companies like Alphabet, Amazon, and Meta to scaleups and early-stage startups have all downsized or postponed hiring.

In an interview with CNBC, Jonathan Golub Managing Director at Credit Suisse warns that big tech earnings are anticipated to be so weak that their absence would benefit the S&P 500. If the US stock performance indicator didn't include tech stocks, according to him, he would expect total income growth projections for companies to increase by 5% this quarter. However, their disappointing performance is more likely to indicate a declining trajectory.

"If you took the S&P and threw out tech and tech-related companies, this earnings season would be expected to grow over 5%," If you include tech, it's expected to grow at like negative-2.5%."

- Jonathan Golub

Recent Q4 earnings calls from the majority of big tech companies also demonstrate the impact microeconomic headwind is having on them. The bulk of the top tech businesses this year reported a decline in growth and revenue for last year's final quarter.

Amazon stocks fell by 51% in 2022, the biggest decline the company has had since 2009, while Apple's quarterly revenues declined for the first time in close to four years, Intel experienced what experts deem to be a historic collapse, and Google's earnings fell precipitously as a result of increased competition and advertisers cutting down on spending. The current economic downturn has hit the tech industry hard. Companies that were once considered invincible have been forced to adapt and make difficult decisions to stay afloat.

Regardless, as the global economy struggles to recover, tech giants are still finding new ways to stay relevant and profitable in a changing market. Starting with the layoffs. Referring to this, Skiller Whale CEO and Co-founder Hywel Carver said:

"Rising inflation and the broad slowdown in the tech industry in 2023 is forcing most companies to do more with less. Historically, growth has required hiring more and more people to undertake each new initiative and develop each new product. Increasingly, we're seeing companies achieve efficiencies by investing in the capabilities of the people they already have with deep coaching, to get more capable, versatile teams without the huge commitments that come with increased headcount. “

Carver added that the economic slump is what is behind the tech layoffs.

“That's the driver behind tech layoffs, with Salesforce's Co-Ceo, Marc Benioff, recently admitting to cutting 10% of their workforce due to previous overstaffing. Adding headcount is a very expensive way to enable growth, and it's the first thing to be cut when companies have to tighten their belts. The growth that comes from making existing staff more productive and skilled, is cheaper, more efficient, and therefore more sustainable."

Adapting Strategies

In response, all of these tech giants have had to adapt and make changes to their business models in order to stay relevant and profitable, and one of the ways that these companies are adapting is by shifting their focus to areas of the market that are more resilient to the economic downturn like AL and cloud.

Even as tech companies tighten their belts, AI research is becoming very popular and progressing at a rapid rate. Most big tech companies are actually counting on AI to give them a competitive advantage.

For example, as Microsoft recently confirmed the layoffs of 10,000 workers amid the recession, the company had plans for a bigger investment in AI. In a blog post put out by both Microsoft and OpenAI, the two companies revealed they are going into partnership. On a clearer note, with an intention to commercialize the results of advanced AI technologies, Microsoft is investing $10 Billion in OpenAI, the maker of ChatGPT. The company claims that this is “an extension of their ongoing collaboration across AI supercomputing and research.”

“Microsoft investing in ChatGPT while also terminating their XR teams signals a doubling down on their productivity tools while surrendering the device-side spatial computing to the likes of Apple and Google. Microsoft wants to continue being the backbone of the productive computer-using workforce.”

- Nils Pihl, CEO of Auki Labs

While Microsoft is firing employees in large amounts, it is still hiring in key areas like AI. The tech giant CEO Satya Nadella, speaking at Davos, said:

“While we are eliminating roles in some areas, we will continue to hire in key strategic areas.”

Google, after previously delaying the public release of some AI systems, citing "ethical challenges"  and “reputational damage” as reasons, is now switching to investments in AI after all to fight OpenAI ChatGPT. This year, it intends to release over 20 AI products, including a demonstration of its own search chatbot. Amid massive layoffs, Google CEO Pichai says AI is still a ‘key investment area’ for the company.

With over 40% of its advertisers currently employing Reels advertisements across its multiple platforms, Meta also seeks to further utilize the use of generative AI and other AI tools inside its advertising endeavors. In the Q4 earning calls with investors and analysts, Meta’s CEO Mark Zuckerberg said,

"Our community continues to grow and I'm pleased with the strong engagement across our apps. Facebook just reached the milestone of 2 billion daily actives. The progress we're making on our AI discovery engine and Reels are major drivers of this. “

Cloud services for big tech also seem still robust for businesses. A high rise in cloud sales implies that companies are continuing with their goals for digital transformation despite more challenging macroeconomic conditions. They see these expenditures as crucial for long-term cost reduction and revenue growth.

The revenue from Microsoft's cloud division increased by 22% to $27.1 billion over the previous year, while the income from Azure and other Cloud services increased by 31%. In the following quarter, the business anticipates a 17% increase in cloud revenue, and while Apple experienced its largest decline since 2016, as the Q4 earning report shows, cloud services of the company established quarterly sales records in the December quarter.

R "Ray" Wang, in a call with Yahoo Finance, remarked that several of the biggest names in technology, like Microsoft, Amazon, and Alphabet, which owns Google, are all well-positioned to gain significantly from their expanding cloud businesses.

"You think about what's going on with Alphabet, Amazon, and Microsoft – these companies all have amazing residuals that are in the cloud, these are three-to-five-year deals in the cloud for Fortune 500 companies that are in the hundreds of millions of dollars. These are also pretty strong."

Future Outlook

The revenue estimate for several of the top tech companies was bleak, particularly when it came to Q1 earnings for the year 2023. Apple, Intel, and AMD are all expected to have a revenue decline for the Q1 earnings; however, this is with the hope of bouncing back by Q2. Whereas Meta, Microsoft, and Amazon expect slightly better revenue growth in the first quarter of the year in most of their business units.

Meanwhile, the vast majority of major tech companies have failed to publish revenue predictions for the year, therefore most of the information regarding the annual revenue estimate of these companies is largely conjecture and imprecise expectations.

But, despite the challenges posed by the economic changes, the reality is that big tech has evinced that it will continue to look for new sources of revenue. By adapting their strategies, cutting costs, and investing in new areas of the market, big tech aims to survive the crisis and thrive after it.

“I think you only have to look at the drawdown of Google Stadia, in conjunction with Facebook’s failed dalliance in the metaverse, to see the evidence of major change in Big Tech. With the looming global recession, it is time to cut costs, especially in areas requiring a massive influx of cash to compete in an arena with an extended runway to the breakeven. While shareholders may have been patient over the past few years when cash was flowing, expect them to crack down on the fantastical visions of executives.”

- Richard Gardner, CEO of Modulus

According to a report by Economist Intelligence, even with macroeconomic headwinds, big tech is still resilient. A slower pace of hiring does not indicate a reduction in investment or innovation – they are only hoping to do more with less. The report indicated that large cash reserves held by big digital corporations total more than half a trillion dollars, possibly allowing them to maintain stability while investing in new markets.

Basically, for what the future looks like for big tech, adaptation seems to be the key theme, and it appears that investing in future technologies, cost-cutting initiatives, and business model diversification are some of the top adaptation strategies for tech giants.

For instance, Intel is reducing spending by $3 billion as a cost-saving measure in an effort to keep the company solvent. While Microsoft, Apple, Google, Meta, and Amazon are all placing a strong emphasis on AI – a form of business model diversification, in a strive to lead the rapidly developing field.