Next week’s inflation data will be the first major test for markets after the Federal Reserve took a dovish stance on interest rates, at a time when bond yields also look to be stabilizing. Stocks have been churning higher lately after Fed Chair Jerome Powell indicated rate hikes are likely off the table , a position that investors expect is a bullish event for equities. A strong earnings season, as well as some cooler labor data , also have investors more optimistic in this year’s outlook. The Dow Jones Industrial Average on Friday registered its eighth straight day of gains, or its longest win streak going back to December, as well as its strongest week of 2024. At the same time, the 10-year Treasury yield has also pulled back from its highs, last at about 4.5% after recently topping 4.7%. .DJI 1M mountain Dow Jones Industrial Average But stocks face a key hurdle next week with the release of April’s consumer price index, which is due out Wednesday. A reading that comes in line with expectations could signal further upside ahead for stocks, while a significantly hotter print could spook investors who worry Fed policymakers will have to revisit their rate expectations. “The Fed has made it clear that they think that CPI is noisy, or just inflation is noisy,” said Mike Dickson, head of research and quantitative strategies at Horizon Investments, adding, “However, if inflation comes in materially higher, that’ll have a pretty big impact on what the Fed is going to do.” On Friday, all three major averages posted a winning week, with the 30-stock index gaining more than 2%. The S & P 500 and Nasdaq Composite were higher by more than 1%, each. The market reaction Inflation data has been crucially important this year for investors. Not only have investors tried to decipher the moves of a data-dependent Fed, but the inflation reports themselves have been less than encouraging as of late. Stocks fell from their highs of the year as investors accepted the likelihood that it may take the Fed longer to get back to its 2% inflation target. But investors are more hopeful about the upcoming slate of data, with UBS saying this week that it anticipates a “renewed fall in U.S. inflation in the coming months.” The April CPI set for release next week is anticipated to show a rise of 0.4% and 3.4% on a monthly and yearly basis, respectively, according to FactSet consensus estimates. That would be from increases of 0.4% and 3.5% the prior month, respectively. Core CPI is expected to show increases of 0.3% on the month and 3.7% on the year. That would be lower from respective increases of 0.4% and 3.8% in the prior month. However, some investors say they will pay special attention to how markets react to the CPI data, more than they will to the report itself. Of note, Horizon Investments’ Dickson said he will be keeping an eye on the ICE BofAML MOVE Index , a gauge that measures volatility in the fixed income market much like the CBOE Volatility Index, or VIX , tracks volatility in stocks. A reading above 100 in MOVE indicates more uncertainty in the interest rate outlook, and can be a bearish signal for equities. Recently, the MOVE index dipped back below 100 after last week’s central bank meeting. But Dickson is hoping the index continues to stay relatively benign after the CPI print comes in as expected, or even a bit higher, as that would indicate the market is counting on the Fed to remain dovish. “That would be a great outcome because it would say the market has confidence in what the Fed said last week,” Dickson said. “And so, that would be an important statistic to keep an eye on.” ‘Fear the cut, not the pause’ Getting past CPI could mean further upside ahead for stocks, especially as more investors come around to the idea that a Fed pause spells good news for equities . In fact, the S & P 500 has averaged a 6% gain during previous pauses over the past 50 years, according to Jeff Buchbinder, chief equity strategist at LPL Financial. But that advance actually jumps to 13.1% on average over the last six pauses going back to 1989, as gains have accelerated in more modern market history. “Long pauses are typically good for stocks, and the gains achieved since the Fed’s last hike in July 2023 are consistent with recent history,” Buchbinder wrote in a recent note. Elsewhere, Strategas’ Jason De Sena Trennert told investors in a note this week that they should “fear the cut, not the pause,” as Fed easing is “usually associated with economic and market stress.” Unless, of course, the central bank manages to achieve a soft landing. For investors hopeful the S & P 500 could end the year higher from here, even after an already stellar start, that could mean a buying opportunity. Growth investor Ken Mahoney, CEO at Mahoney Asset Management, anticipates investors can now buy back into the megacap tech stocks, except Tesla, after their recent declines. “Big-cap tech were tested in April,” Mahoney said. “But after earnings, I think … the balance sheets, the buybacks, the growth potential, the AI potential, and so on, all those headwinds are still intact.” If anything, the investor said the ability of stocks to make it over the recent wall of worry could mean the gains from here on out are more sustainable. “In April, the market, I think, got hit three different times, and held on very nicely,” Mahoney said. “So I think that’s another reason why there’s a sense of bullishness again.” Consumer earnings reports are also on deck next week. Home Depot reports Tuesday, as does Charles Schwab. Walmart and Deere report Thursday. Week ahead calendar All times ET. Monday May 13 No notable events Tuesday May 14 8:30 a.m. Producer Price Index (April) Earnings: Home Depot , Charles Schwab Wednesday May 15 8:30 a.m. Consumer Price Index (April) 8:30 a.m. Hourly Earnings (April) 8:30 a.m. Average Workweek (April) 8:30 a.m. Empire State index (May) 8:30 a.m. Retail Sales (April) 10 a.m. Business Inventories (March) 10 a.m. NAHB Housing Market Index (May) Earnings: Progressive , Cisco Thursday May 16 8:30 a.m. Building Permits preliminary (April) 8:30 a.m. Continuing Jobless Claims (05/04) 8:30 a.m. Export Price Index (April) 8:30 a.m. Housing Starts (April) 8:30 a.m. Import Price Index (April) 8:30 a.m. Initial Claims (05/11) 8:30 a.m. Philadelphia Fed Index (May) 9:15 a.m. Capacity Utilization (April) 9:15 a.m. Industrial Production (April) 9:15 a.m. Manufacturing Production (April) Earnings: Take-Two Interactive Software , Applied Materials , Walmart , Deere Friday May 17 10 a.m. Leading Indicators (April)
Tag: Cisco Systems Inc
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Companies — profitable or not — make 2024 the year of cost cuts
Mathisworks | Digitalvision Vectors | Getty Images
Corporate America has a message for Wall Street: It’s serious about cutting costs this year.
From toy and cosmetics makers to office software sellers, executives across sectors have announced layoffs and other plans to slash expenses â even at some companies that are turning a profit. Barbie maker Mattel, PayPal, Cisco, Nike, Estée Lauder and Levi Strauss are just a few of the firms that have cut jobs in recent weeks.
Department store retailer Macy’s said it will close five of its namesake department stores and cut more than 2,300 jobs. JetBlue Airways and Spirit Airlines have offered staff buyouts, while United Airlines cut first-class meals on some of its shortest flights.
As consumers watch their wallets, companies have felt pressure from investors to do the same. Executives have sought to show shareholders that they’re adjusting to consumer demand as it returns to typical patterns or even softens, as well as aggressively countering higher expenses.
Airlines, automakers, media companies and package giant UPS are all digesting new labor contracts that gave raises to tens of thousands of workers and drove costs higher.
Companies in years past could get away with passing on higher costs to customers who were willing to splurge on everything from new appliances to beach vacations. But businesses’ pricing power has waned, so executives are looking for other ways to manage the budget â or squeeze out more profits, said Gregory Daco, chief economist for EY.
“You are in an environment where cost fatigue is very much part of the equation for consumers and business leaders,” Daco said. “The cost of most everything is much higher than it was before the pandemic, whether it’s goods, inputs, equipment, labor, even interest rates.”
There are some exceptions to the recent cost-cutting wave: Walmart, for example, said last month that it would build or convert more than 150 stores over the next five years, along with a more than $9 billion investment to modernize many of its current stores.
And some companies, such as banks, already made deep cuts. Five of the largest banks, including Wells Fargo and Goldman Sachs, together eliminated more than 20,000 jobs in 2023. Now, they’re awaiting interest rate cuts by the Federal Reserve that would free up cash for pent-up mergers and acquisitions.
But cost reductions unveiled in even just the first few weeks of the year amount to tens of thousands of jobs and billions of dollars. In January, U.S. companies announced 82,307 job cuts, more than double the number in December, while still down 20% from a year ago, according to Challenger, Gray and Christmas.
And the tightening of months prior is already showing up in financial reports.
So far this earnings season, results have indicated that companies have focused on driving profits higher without the tailwind of big price increases and sales growth.
As of mid-February, more than three-quarters of the S&P 500 had reported fourth-quarter results, with far more earnings beats than revenue beats. The quarter’s earnings, measured by a composite of S&P 500 companies, are on pace to rise nearly 10%. Revenues, however, are up a more modest 3.4%.
Layoffs, flight cuts and store closures
While companies’ drive for higher profits isn’t new, they have made bolstering the bottom line a priority this year.
Downsizing has rippled across the tech industry, as companies followed the lead of Meta’s 2023 cuts, which many analysts credited with helping the social media giant rebound from a rough 2022. CEO Mark Zuckerberg had dubbed 2023 the “year of efficiency” for the parent of Facebook and Instagram, as it slashed the size of its workforce and vowed to carry forward its leaner approach.
In recent weeks, Amazon, Alphabet, Microsoft and Cisco, among others, have announced staffing reductions.
And the layoffs haven’t been contained to tech. UPS said it was axing 12,000 jobs, saving the company $1 billion, CEO Carol Tome said late last month, citing softer demand. Many of the largest retail, media and entertainment companies have also announced workforce reductions, in addition to other cuts.
Warner Bros. Discovery has slashed content spending and headcount as part of $4 billion in total cost savings from the merger of Discovery and WarnerMedia. Disney initially promised $5.5 billion in cost reductions in 2023, fueled by 7,000 layoffs. The company has since increased its savings promise to $7.5 billion, and executives suggested in its Feb. 7 quarterly earnings report that it may exceed that target.
Last week, Paramount Global announced hundreds of layoffs in an effort to “operate as a leaner company and spend less,” according to CEO Bob Bakish. Comcast’s NBCUniversal, the parent company of CNBC, has also recently eliminated jobs.
JetBlue Airways, which hasn’t posted an annual profit since before the pandemic, is deferring about $2.5 billion in capital expenditures on new Airbus planes to the end of the decade, culling unprofitable routes and redeploying aircraft in addition to the worker buyouts.
Delta Air Lines, which is profitable, in November said it was cutting some office jobs, calling it a “small adjustment.”
Some cuts are even making their way to the front of the cabin. United Airlines, which also posted a profit in 2023, at the start of this year said it would serve first-class meals only on flights more than 900 miles, up from 800 miles previously. “On flights that are 301 to 900 miles, United First customers can expect an offering from the premium snack basket,” according to an internal post.
Several of the country’s largest automakers, such as General Motors and Ford Motor, have lowered spending by billions of dollars through reduced or delayed investments on all-electric vehicles. The U.S.-based companies as well as others, such as Netherlands-based Stellantis, have recently reduced headcount and payroll through voluntary buyouts or layoffs.
Even Chipotle, which reported more foot traffic and sales at its restaurants in the most recently reported quarter, is chasing higher productivity by testing an avocado-scooping robot called the Autocado that shortens the time it takes to make guacamole. It’s also testing another robot that can put together burrito bowls and salads. The robots, if expanded to other stores, could help cut costs by minimizing food waste or reducing the number of workers needed for those tasks.
Shifting patterns
Industry experts have chalked up some recent cuts to companies catching their breath â and taking a hard look at how they operate â after an unusual four-year stretch caused by the pandemic and its fallout.
EY’s Daco said the past few years have been marked by a mismatch in supply and demand when it comes to goods, services and even workers.
Customers went on shopping sprees, fueled by government stimulus and less experience-related spending. Airlines saw demand disappear and then skyrocket. Companies furloughed workers in the early pandemic and then struggled to fill jobs.
He said he expects companies this year to “search for an equilibrium.”
“You’re seeing a rebalancing happening in the labor markets, in the capital markets,” he said. “And that rebalancing is still going to play out and gradually lead to a more sustainable environment of lower inflation and lower interest rates, and perhaps a little bit slower growth.”
The auto industry, for example, faced a supply issue during much of the Covid pandemic but is now facing a potential demand problem. Inventories of new vehicles are rising â surpassing 2.5 million units and 71 days’ supply toward the end of 2023, up 57% year over year, according to Cox Automotive â forcing automakers to extend more discounts in an effort to move cars and trucks off dealer lots.
Automakers have also been contending with slower-than-expected adoption of EVs.
David Silverman, a retail analyst at Fitch Ratings, said companies are “feeling a bit heavy as sales growth moderates and maybe even declines.”
Cost cuts at UPS, Hasbro and Levi all followed sales declines in the most recent fiscal quarter. Macy’s, which reports earnings later this month, has said it expects same-store sales to drop, and there’s early evidence that may come to bear: Consumers pulled back on spending in January, with retail sales falling 0.8%, more than economists expected, according to the latest federal data.
Most major retailers, including Walmart, Target and Home Depot, will report earnings in the coming weeks.
Credit ratings agency Fitch said it doesn’t expect the U.S. economy to tip into recession, but it does anticipate a continued pullback in discretionary spending.
“Part of companies’ decision to lower their expense structure is in line with their views that 2024 may not be a fantastic year from a top-line-growth standpoint,” Silverman said.
Plus, he added, companies have had to find cash to fund investments in newer technology such as infrastructure that supports e-commerce, a resilient supply chain or investments in artificial intelligence.
Forward momentum
Companies may have another reason to cut costs now, too. As they see other companies shrinking the size of their workforces or budgets, there’s safety in numbers.
Or as Silverman noted, “layoffs beget layoffs.”
“As companies have started to announce them it becomes normalized,” he said. “There’s less of a stigma.”
Even with rolling layoffs, the labor market remains strong, which may help explain why Wall Street has by and large rewarded those companies that have found areas to save and returned profits to shareholders.
Shares of Meta, for example, almost tripled in price in 2023 in that “year of efficiency,” making the stock the second-best gainer in the S&P 500, behind only Nvidia. After laying off more than 20,000 workers in 2023, Meta on Feb. 2 announced its first-ever dividend and said it expanded its share buyback authorization by $50 billion.
UPS, fresh from job cuts, said it would raise its quarterly dividend by a penny.
Overall, dividends paid by companies in the S&P 500 rose 5.05% last year, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, and he estimated they will likely increase nearly 5.3% this year.
â CNBC’s Michael Wayland, Alex Sherman, Robert Hum, Amelia Lucas and Jonathan Vanian contributed to this story.
Disclosure: Comcast owns NBCUniversal, the parent company of CNBC.
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Signs of a sector rotation — plus 2 more themes to watch in the stock market
People walk by the New York Stock Exchange (NYSE) on November 02, 2023 in New York City.
Spencer Platt | Getty Images News | Getty Images
It was another win for the bulls this week. Wall Street started the month of December higher Friday — building on November’s rally, which broke a three-month losing streak. November really lived up to its stellar reputation, with monthly gains of nearly 8.8% for the Dow, about 8.9% for the S&P 500 and 10.7% for the Nasdaq. Historically, November is the best month of the year for the stock market, and December is third, according to the Stock Trader’s Almanac.
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By buying Splunk, Cisco is closer to becoming a software company
With Cisco Systems Inc.’s pending acquisition of Splunk Inc., the networking giant is making another major step toward becoming a software company.
On Thursday, Cisco CSCO said it was buying Splunk SPLK in a deal valued at about $28 billion, or $157 a share in cash, for the cloud-security company. The match had been speculated about for years, and Cisco has been on a buying binge this year, as it seeks to grow with more security and software offerings.
“Together, we will become one of…
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Cisco makes largest ever acquisition, buying cybersecurity company Splunk for $28 billion in cash
Cisco is acquiring cybersecurity software company Splunk for $157 per share in a cash deal worth about $28 billion, the company said Thursday, in its largest acquisition ever.
Splunk shares ended Thursday up 21%, while Cisco shares closed down 4%.
Splunk’s technology helps businesses monitor and analyze their data to minimize the risk of hacks and resolve technical issues faster. Cisco has long been the world’s largest maker of computer networking equipment and has been bolstering its cybersecurity business to meet customer demands and fuel growth.
Cisco CEO Chuck Robbins emphasized the importance of artificial intelligence and using the power of AI that comes with Splunk’s technology to protect networks.
“Our combined capabilities will drive the next generation of AI-enabled security and observability,” Robbins said, in a statement. “From threat detection and response to threat prediction and prevention, we will help make organizations of all sizes more secure and resilient.”
The deal is expected to close in the third quarter of 2024, and Cisco says it should improve gross margins in the first year and non-GAAP earnings in year two.
The purchase price is equivalent to about 13% of Cisco’s market cap, a big number for a company that has historically avoided blockbuster deals. Prior to Splunk, Cisco’s biggest deal ever was the $6.9 billion purchase of cable set-top box maker Scientific Atlanta in 2006. At the time, Cisco’s market cap was just over $100 billion.
But as the public cloud has gobbled more of Cisco’s traditional back-end business, the company has needed to find new and big revenue streams. Cybersecurity has been the biggest bet.
In fiscal 2022, Cisco changed the name of its core switching and routing business from Infrastructure Platforms to Secure, Agile Networks, focusing on the need to have security built into networking gear. The company has a separate reporting unit called End-to-End Security, consisting specifically of security products.
Revenue in the core business climbed 22% in the fiscal year ended July 29, to $29.1 billion, and the security unit saw sales rise 4% to $3.9 billion.
Cisco shares have underperformed the Nasdaq this year, rising 12% while the tech-heavy index has jumped 27%. Over the past five years, it’s been an even worse investment relative to the broader sector. The stock is up about 10% over that stretch, trailing the Nasdaq’s 66% gain.
Splunk logo displayed on a phone screen and a laptop keyboard are seen in this illustration photo taken in Krakow, Poland on October 30, 2021. (Photo by Jakub Porzycki/NurPhoto via Getty Images)
Jakub Porzycki | Nurphoto | Getty Images
Robbins told CNBC’s “Squawk on the Street” on Thursday that he expects organizational synergies between Cisco and Splunk to become clear within 12 to 18 months. The company will finance the deal with a combination of cash and debt, he said.
“Together, we will become one of the largest software companies globally,” Robbins said in a conference call with analysts.
Following the announcement, some analysts raised concerns about potential product overlap, regulatory scrutiny and the price Cisco paid. Oppenheimer’s Ittai Kidron noted on the call that Splunk’s pivot to the cloud has been “underwhelming.”
In recent years, Splunk turned away from an on-premises “customer-managed” approach to focus on a cloud-oriented offering.
Splunk CEO Gary Steele, who will join Cisco’s executive team after the deal closes, said on the call with analysts that, “We still have many large customers who are very dependent upon the capabilities that we allow for in a customer managed environment.”
Steele joined Splunk a little over a year ago. Prior to that, he was CEO of Proofpoint, a cybersecurity firm that was acquired by private equity firm Thoma Bravo in 2021 for $12.3 billion.
If Cisco backs out of the deal or if it’s blocked by regulators, Cisco will pay Splunk a termination fee of $1.48 billion, according to a regulatory filing. Should Splunk walk away, it will pay a $1 billion breakup fee to Cisco.
In 2023, Cisco has acquired four companies focused on security: Armorblox, a threat detection platform; Oort, which does identity management; and Valtix and Lightspin, both in cloud security.
Tidal Partners, Simpson Thacher, and Cravath, Swaine & Moore advised Cisco. Qatalyst Partners, Morgan Stanley, and Skadden, Arps, Slate, Meagher & Flom advised Splunk.
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Cisco taps new M&A firm Tidal for $28 billion Splunk acquisition deal | CNN Business
A new mergers and acquisitions advisory firm launched last year by former Centerview Partners dealmakers has scored a big win by advising Cisco Systems on its $28 billion acquisition of cybersecurity firm Splunk.
Based in Palo Alto, California, Tidal Partners was started by technology bankers David Handler and David Neequaye. Their firm, which employs just two dozen people, according to its website, was the sole financial adviser to Cisco, while larger investment banking peers Qatalyst Partners and Morgan Stanley advised Splunk.
While at Centerview, Handler worked closely with Cisco for several years and advised on numerous deals, including Cisco’s $5 billion acquisition of NDS Group in 2012 and Cisco’s $3.7 billion purchase of AppDynamics in 2017.
“We’ve known David (Handler) and his partner David (Neequaye) for a very long time. They did a great job for us, and so we’ve had that relationship for a long time,” Cisco CEO Chuck Robbins said in an interview on Thursday.
Tidal’s win comes as more technology bankers decide to launch their own firms amid an overall slowdown in dealmaking in the sector. Three former Qatalyst Partners bankers launched a new technology-focused investment banking boutique called AXOM Partners earlier this week, Reuters reported.
Handler and Neequaye helped launch Centerview’s technology advisory group in 2008. The group went on to advise other major technology companies, including Cisco, Qualcomm Inc and Twilio.
Since its launch last year, Tidal Partners has advised on transactions, including ServiceNow Inc’s acquisition of G2K Group and Bloom Energy’s $550 million convertible notes offering.
Handler, who previously worked at UBS Group, sued Centerview after his departure over a pay dispute.
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Stocks making the biggest moves after hours: Take-Two Interactive, Cisco Systems and more
Check out the companies making headlines in extended trading.
Take-Two Interactive Software — Shares jumped 8.1% Wednesday during after hours trading. The video game company reported $1.39 billion in adjusted revenue in the fiscal fourth quarter, topping analysts’ estimates of $1.34 billion, according to Refinitiv. Meanwhile, the company’s estimates for bookings in the first-quarter and full-year missed Wall Street’s expectations.
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Boot Barn Holdings — Shares of the cowboy boot company tumbled almost 16% after revenue fell short of analysts’ expectations for the fiscal fourth quarter. Boot Barn reported earnings of $1.51 per share, excluding items on revenue of $425.7 million. Meanwhile, analysts polled by FactSet had expected earnings of $1.44 per share and $441.2 million in revenue. The boot retailer’s full-year guidance also fell below analysts’ estimates.
Synopsys — The software company’s stock gained 1.9% Wednesday evening. Synopsys’ fiscal second-quarter earnings and revenue came above Wall Street’s expectations, according to FactSet. The company reported $1.4 billion in revenue, while analysts had estimated $1.38 billion. Synopsys also reported an earnings beat of $2.54 per share, excluding items, topping analysts’ estimates of $2.48 per share. Synopsys also raised its full-year guidance for earnings and revenue growth.
Cisco Systems — Shares dipped nearly 4% despite the company reporting an earnings and revenue beat for the fiscal third quarter. Cisco posted adjusted earnings of $1 per share and $14.57 billion in revenue. Analysts had estimated 97 cents earnings per share and $14.39 billion in revenue, according to Refinitiv.
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These 5 dividend-paying Club stocks are expected to grow earnings double-digits this year
Workers walk towards Halliburton Co. “sand castles” at an Anadarko Petroleum Corp. hydraulic fracturing (fracking) site north of Dacono, Colorado, U.S., on Tuesday, Aug. 12, 2014.
Jamie Schwaberow | Bloomberg | Getty Images
Wells Fargo (WFC) and Halliburton (HAL) headline a group of five dividend-paying Club stocks that are expected to post robust earnings growth this year.
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Tech’s reality check: How the industry lost $7.4 trillion in one year
Pedestrians walk past the NASDAQ MarketSite in New York’s Times Square.
Eric Thayer | Reuters
It seems like an eternity ago, but it’s just been a year.
At this time in 2021, the Nasdaq Composite had just peaked, doubling since the early days of the pandemic. Rivian’s blockbuster IPO was the latest in a record year for new issues. Hiring was booming and tech employees were frolicking in the high value of their stock options.
Twelve months later, the landscape is markedly different.
Not one of the 15 most valuable U.S. tech companies has generated positive returns in 2021. Microsoft has shed roughly $700 billion in market cap. Meta’s market cap has contracted by over 70% from its highs, wiping out over $600 billion in value this year.
In total, investors have lost roughly $7.4 trillion, based on the 12-month drop in the Nasdaq.
Interest rate hikes have choked off access to easy capital, and soaring inflation has made all those companies promising future profit a lot less valuable today. Cloud stocks have cratered alongside crypto.
There’s plenty of pain to go around. Companies across the industry are cutting costs, freezing new hires, and laying off staff. Employees who joined those hyped pre-IPO companies and took much of their compensation in the form of stock options are now deep underwater and can only hope for a future rebound.
IPOs this year slowed to a trickle after banner years in 2020 and 2021, when companies pushed through the pandemic and took advantage of an emerging world of remote work and play and an economy flush with government-backed funds. Private market darlings that raised billions in public offerings, swelling the coffers of investment banks and venture firms, saw their valuations marked down. And then down some more.
Rivian has fallen more than 80% from its peak after reaching a stratospheric market cap of over $150 billion. The Renaissance IPO ETF, a basket of newly listed U.S. companies, is down 57% over the past year.
Tech executives by the handful have come forward to admit that they were wrong.
The Covid-19 bump didn’t, in fact, change forever how we work, play, shop and learn. Hiring and investing as if we’d forever be convening happy hours on video, working out in our living room and avoiding airplanes, malls and indoor dining was — as it turns out — a bad bet.
Add it up and, for the first time in nearly two decades, the Nasdaq is on the cusp of losing to the S&P 500 in consecutive years. The last time it happened the tech-heavy Nasdaq was at the tail end of an extended stretch of underperformance that began with the bursting of the dot-com bubble. Between 2000 and 2006, the Nasdaq only beat the S&P 500 once.
Is technology headed for the same reality check today? It would be foolish to count out Silicon Valley or the many attempted replicas that have popped up across the globe in recent years. But are there reasons to question the magnitude of the industry’s misfire?
Perhaps that depends on how much you trust Mark Zuckerberg.
Meta’s no good, very bad, year
It was supposed to be the year of Meta. Prior to changing its name in late 2021, Facebook had consistently delivered investors sterling returns, beating estimates and growing profitably with historic speed.
The company had already successfully pivoted once, establishing a dominant presence on mobile platforms and refocusing the user experience away from the desktop. Even against the backdrop of a reopening world and damaging whistleblower allegations about user privacy, the stock gained over 20% last year.
But Zuckerberg doesn’t see the future the way his investors do. His commitment to spend billions of dollars a year on the metaverse has perplexed Wall Street, which just wants the company to get its footing back with online ads.
The big and immediate problem is Apple, which updated its privacy policy in iOS in a way that makes it harder for Facebook and others to target users with ads.
With its stock down by two-thirds and the company on the verge of a third straight quarter of declining revenue, Meta said earlier this month it’s laying off 13% of its workforce, or 11,000 employees, its first large-scale reduction ever.
“I got this wrong, and I take responsibility for that,” Zuckerberg said.
Mammoth spending on staff is nothing new for Silicon Valley, and Zuckerberg was in good company on that front.
Software engineers had long been able to count on outsized compensation packages from major players, led by Google. In the war for talent and the free flow of capital, tech pay reached new heights.
Recruiters at Amazon could throw more than $700,000 at a qualified engineer or project manager. At gaming company Roblox, a top-level engineer could make $1.2 million, according to Levels.fyi. Productivity software firm Asana, which held its stock market debut in 2020, has never turned a profit but offered engineers starting salaries of up to $198,000, according to H1-B visa data.
Fast forward to the last quarter of 2022, and those halcyon days are a distant memory.
Layoffs at Cisco, Meta, Amazon and Twitter have totaled nearly 29,000 workers, according to data collected by the website Layoffs.fyi. Across the tech industry, the cuts add up to over 130,000 workers. HP announced this week it’s eliminating 4,000 to 6,000 jobs over the next three years.
For many investors, it was just a matter of time.
“It is a poorly kept secret in Silicon Valley that companies ranging from Google to Meta to Twitter to Uber could achieve similar levels of revenue with far fewer people,” Brad Gerstner, a tech investor at Altimeter Capital, wrote last month.
Gerstner’s letter was specifically targeted at Zuckerberg, urging him to slash spending, but he was perfectly willing to apply the criticism more broadly.
“I would take it a step further and argue that these incredible companies would run even better and more efficiently without the layers and lethargy that comes with this extreme rate of employee expansion,” Gerstner wrote.
Activist investor TCI Fund Management echoed that sentiment in a letter to Google CEO Sundar Pichai, whose company just recorded its slowest growth rate for any quarter since 2013, other than one period during the pandemic.
“Our conversations with former executives suggest that the business could be operated more effectively with significantly fewer employees,” the letter read. As CNBC reported this week, Google employees are growing worried that layoffs could be coming.
SPAC frenzy
Remember SPACs?
Those special purpose acquisition companies, or blank-check entities, created so they could go find tech startups to buy and turn public were a phenomenon of 2020 and 2021. Investment banks were eager to underwrite them, and investors jumped in with new pools of capital.
SPACs allowed companies that didn’t quite have the profile to satisfy traditional IPO investors to backdoor their way onto the public market. In the U.S. last year, 619 SPACs went public, compared with 496 traditional IPOs.
This year, that market has been a bloodbath.
The CNBC Post SPAC Index, which tracks the performance of SPAC stocks after debut, is down over 70% since inception and by about two-thirds in the past year. Many SPACs never found a target and gave the money back to investors. Chamath Palihapitiya, once dubbed the SPAC king, shut down two deals last month after failing to find suitable merger targets and returned $1.6 billion to investors.
Then there’s the startup world, which for over a half-decade was known for minting unicorns.
Last year, investors plowed $325 billion into venture-backed companies, according to EY’s venture capital team, peaking in the fourth quarter of 2021. The easy money is long gone. Now companies are much more defensive than offensive in their financings, raising capital because they need it and often not on favorable terms.
“You just don’t know what it’s going to be like going forward,” EY venture capital leader Jeff Grabow told CNBC. “VCs are rationalizing their portfolio and supporting those that still clear the hurdle.”
The word profit gets thrown around a lot more these days than in recent years. That’s because companies can’t count on venture investors to subsidize their growth and public markets are no longer paying up for high-growth, high-burn names. The forward revenue multiple for top cloud companies is now just over 10, down from a peak of 40, 50 or even higher for some companies at the height in 2021.
The trickle down has made it impossible for many companies to go public without a massive markdown to their private valuation. A slowing IPO market informs how earlier-stage investors behave, said David Golden, managing partner at Revolution Ventures in San Francisco.
“When the IPO market becomes more constricted, that circumscribes one’s ability to find liquidity through the public market,” said Golden, who previously ran telecom, media and tech banking at JPMorgan. “Most early-stage investors aren’t counting on an IPO exit. The odds against it are so high, particularly compared against an M&A exit.”
There have been just 173 IPOs in the U.S. this year, compared with 961 at the same point in 2021. In the VC world, there haven’t been any deals of note.
“We’re reverting to the mean,” Golden said.
An average year might see 100 to 200 U.S. IPOs, according to FactSet research. Data compiled by Jay Ritter, an IPO expert and finance professor at the University of Florida, shows there were 123 tech IPOs last year, compared with an average of 38 a year between 2010 and 2020.
Buy now, pay never
There’s no better example of the intersection between venture capital and consumer spending than the industry known as buy now, pay later.
Companies such as Affirm, Afterpay (acquired by Block, formerly Square) and Sweden’s Klarna took advantage of low interest rates and pandemic-fueled discretionary incomes to put high-end purchases, such as Peloton exercise bikes, within reach of nearly every consumer.
Affirm went public in January 2021 and peaked at over $168 some 10 months later. Affirm grew rapidly in the early days of the Covid-19 pandemic, as brands and retailers raced to make it easier for consumers to buy online.
By November of last year, buy now, pay later was everywhere, from Amazon to Urban Outfitters‘ Anthropologie. Customers had excess savings in the trillions. Default rates remained low — Affirm was recording a net charge-off rate of around 5%.
Affirm has fallen 92% from its high. Charge-offs peaked over the summer at nearly 12%. Inflation paired with higher interest rates muted formerly buoyant consumers. Klarna, which is privately held, saw its valuation slashed by 85% in a July financing round, from $45.6 billion to $6.7 billion.
The road ahead
That’s all before we get to Elon Musk.
The world’s richest person — even after an almost 50% slide in the value of Tesla — is now the owner of Twitter following an on-again, off-again, on-again drama that lasted six months and was about to land in court.
Musk swiftly fired half of Twitter’s workforce and then welcomed former President Donald Trump back onto the platform after running an informal poll. Many advertisers have fled.
And corporate governance is back on the docket after this month’s sudden collapse of cryptocurrency exchange FTX, which managed to grow to a $32 billion valuation with no board of directors or finance chief. Top-shelf firms such as Sequoia, BlackRock and Tiger Global saw their investments wiped out overnight.
“We are in the business of taking risk,” Sequoia wrote in a letter to limited partners, informing them that the firm was marking its FTX investment of over $210 million down to zero. “Some investments will surprise to the upside, and some will surprise to the downside.”
Even with the crypto meltdown, mounting layoffs and the overall market turmoil, it’s not all doom and gloom a year after the market peak.
Golden points to optimism out of Washington, D.C., where President Joe Biden’s Inflation Reduction Act and the Chips and Science Act will lead to investments in key areas in tech in the coming year.
Funds from those bills start flowing in January. Intel, Micron and Taiwan Semiconductor Manufacturing Company have already announced expansions in the U.S. Additionally, Golden anticipates growth in health care, clean water and energy, and broadband in 2023.
“All of us are a little optimistic about that,” Golden said, “despite the macro headwinds.”
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Cisco’s stock rises on strong quarterly sales and guidance, but a restructuring is coming
Cisco Systems Inc.’s stock rose in extended trading Wednesday after the networking-technology company delivered better-than-expected numbers on the top and bottom line, and offered encouraging guidance.
Still, Cisco Chief Financial Officer Scott Herren announced a “limited business restructuring,” to be shared with employees on Thursday, that will right-size its real-estate portfolio and impact about 5% of its 80,000 workers worldwide — or 4,000 people. “This is about rebalancing across the board,” he said, adding that as many jobs will be added as reduced.
“Our goal is to minimize the number of people who end up having to leave,” Herren told MarketWatch. “We will match as many with new roles at the company as we can. This is not about reducing our workforce — in fact we’ll have roughly the same number of employees at the end of this fiscal year as we had when we started.”
Cisco
CSCO,
-1.14%
reported a fiscal first-quarter net income of $2.7 billion, or 65 cents a share, compared with net income of $3 billion, or 70 cents a share, in the year-ago quarter. Adjusted earnings were 86 cents a share. Revenue was $13.6 billion, up 6% from $12.9 billion a year ago.Analysts surveyed by FactSet had expected on average net income of 84 cents a share on revenue of $13.3 billion. Shares gained 4% in after-hours trading following the results, after closing down 1% in regular trading Wednesday at $44.39.
“Our fiscal 2023 is off to a good start as we delivered the largest quarterly revenue and second-highest quarterly non-GAAP earnings per share in our history,” Cisco Chief Executive Chuck Robbins said in a statement announcing the results. During a conference call with analysts late Wednesday, Robbins noted “modest improvement” in component delivery amid an easing supply-chain pipeline.
Cisco’s Product ($10.25 billion) and Service ($3.39 billion) businesses were up slightly year over year. Secure, Agile Networks, the company’s top business segment including data-center networking switches, hauled in $6.68 billion, up 12% from a year ago.
Herren recognized buying caution in Europe driven by a dramatic increase in energy costs and market volatility. The company has also shut down operations in Russia.
For the fiscal second quarter, Cisco executives guided for 84 cents to 86 cents a share in adjusted profit and revenue growth of 4.5% to 6.5%. Analysts were forecasting adjusted earnings of 85 cents and revenue of $13.24 billion, according to FactSet.
Shares of Cisco Systems have dwindled 30% this year, while the broader S&P 500 index
SPX,
-0.83%
has tailed off 17%.In the days leading up to Cisco’s report, financial analysts had expected results and guidance in line with their modest expectations but warned of lingering supply-chain woes.
“We model 15-20% declines in orders [year-over-year] due to tough compares a year ago and stronger seasonality last quarter, but backlog should protect revenues for now,” Barclays analyst Tim Long said in a note to investors on Tuesday.
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CNBC Pro Talks: Hedge fund manager Dan Niles bought Meta shares. Here’s his strategy for tech names
The Satori Fund founder Dan Niles shares his macro analysis of the large-cap tech sector, when he thinks the market will hit the bottom, and which names he thinks are poised to rebound going into 2023.
