Cloud-based software company Salesforce (New York Stock Exchange: CRM) and e-commerce giant Amazon (NASDAQ: AMZN) have something in common. Last week, both companies announced layoffs, regaining investor interest driven by hopes of better margins in the future. For these predictable tech companies, it’s an immediate challenge.
Tech layoffs that began in 2022 will continue into 2023. The pandemic boom has subsided and the economic downturn suggests further revenue declines in the coming quarters. But layoffs may be a good thing in these uncertain times. Let’s take a closer look at CRM and AMZN.
CRM stocks, which outperformed during the pandemic, have come full circle and are now trading near pre-pandemic levels.
Due to the challenging macro environment and inherent business slowdown, Salesforce laid off 8,000 jobs (10% of its workforce) on January 4th. In addition, the company’s restructuring plan aims to further reduce costs and improve margins by reducing office space and selling real estate.
In a letter to employees, Salesforce CEO Marc Benioff said, “We are hiring too many people because the pandemic has accelerated our earnings, leading to this economic downturn we are currently facing. I am responsible for it,” he said.
For reference, Salesforce had approximately 80,000 employees at the end of October 2022. This is almost double the 48,000 employees it had before the pandemic three years ago.
The company expects to incur costs of $1.4 billion to $2.1 billion related to cost-cutting measures. Of that amount, $0.8 billion to $1.0 billion occurred in the fourth fiscal quarter, and $1.2 billion to $1.7 billion will be reported in the future.
The company declined to disclose its prospects for long-term cost savings resulting from its restructuring plans.Sales and general administrative expenses account for the majority of operating costs, according to Salesforce’s income statement. Therefore, headcount reductions should certainly boost profit margins.
Meanwhile, Salesforce’s revenue growth has disappointingly slowed, hitting a record low of 14% in Q3. The company expects that number to drop further in its fourth quarter results, due to be released on February 28.
There are other issues facing the company, including executive resignations. Co-CEO Brett Taylor recently resigned. Additionally, his CEO of Slack, Stewart Butterfield, has also left the company (Slack was acquired by Salesforce in 2020).
Longer term, the company aims to achieve an adjusted operating margin of 25% by fiscal year 2026 on the back of $50 billion in revenue. Given the current recessionary scenario, both goals seem difficult to achieve. That said, a successful restructuring effort could bring the company closer to its goals.
Are CRM Stocks a Strong Buy, According to Analysts?
CRM stock has a strong buy rating on Wall Street based on 27 buys and 8 holds. Salesforce’s average price forecast of $193.45 suggests a 31.2% upside potential.
Amazon has had a very tough year in 2022. In fact, it broke records by being the first public company to lose a valuation of over $1 trillion. Last week, Amazon announced its biggest ever layoffs as it plans to lay off 18,000 of her employees. This represents approximately 6% of all employees.
CEO Andy Jassy said most of the layoffs came from the company’s e-commerce and human resources departments. On a positive note, this could mean that his AWS, Amazon’s growth engine, may be less affected by job cuts.
In retrospect, COVID-19 winner Amazon expanded its logistics network around the world and significantly expanded its workforce to meet the surge in demand for online goods during lockdown.
With the return to normal, the unusual demand subsided. What’s more, rising interest rates in 2022, inflation and subsequent cutbacks in consumer spending have further hit revenue growth and profitability. In such a scenario, headcount reductions help the company control costs amid declining revenue expectations.
In particular, e-commerce revenue has fallen, but Amazon’s primary growth engine, AWS, has remained resilient. AWS’ leadership position in the cloud infrastructure space is undeniable and shows strong growth prospects over the next few years.
Is Amazon a Buy, According to Analysts?
The Wall Street community remains optimistic about Amazon’s stock, despite a significant price drop in 2022. Overall, the stock has a strong buy consensus rating based on his 36 buys and his 3 holds. Amazon’s average price target of $137.50 suggests a potential upside of 53% from current levels.
Takeaway
Given their dominance, Amazon and Salesforce have great potential for long-term growth. In the short term, however, it is likely to stay within range as both companies continue cost-cutting initiatives to combat the slowdown.
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