Technology’s longtime highfliers are growing smaller

Tech companies are learning an old lesson from Wall Street: Maturing means shrinking.

Half AND Amazon saw their shares rise on Friday following their fourth-quarter earnings reports. While revenues for both beat estimates, the story for investors is that they are demonstrating their ability to do more with less, an attractive equation for shareholders.

There is also recognition that investors value, in many cases, cash above all else. The tech industry has long preferred to reinvest excess cash into growth, ramping up hiring and pioneering the next big innovation. But after a year of massive layoffs and capital preservation, Meta on Thursday announced that, for the first time, it will pay a quarterly dividend of 50 cents a share, while also authorizing an additional $50 billion stock repurchase plan.

“The key to these companies is that they really are able to reinvent themselves,” Daniel Flax, an analyst at Neuberger Berman, said in an interview with CNBC’s “Squawk Box” on Friday. They “continue to invest for the future and play offensively and at the same time manage expenses in this difficult environment,” he said.

Amazon is moving less aggressively to send cash to shareholders, but the topic is certainly up for debate. The company set up a $10 billion buyback program in 2022 and has announced nothing since then. On Thursday’s earnings call, Morgan Stanley analyst Brian Nowak asked about plans for further capital returns.

“I’m really excited to have this question,” finance chief Brian Olsavsky said in response. “No one has asked me that in three years.”

Olsavsky added that “we discuss and discuss capital structure policies every year or more often,” but said the company had nothing to announce. “We are pleased to have the best liquidity at the end of 2023 and will look to continue to build it,” he said.

After years of seemingly uncontrolled growth, the world’s largest Internet companies have entered firmly into a new era. They are still looking for top technical talent, particularly in areas like artificial intelligence, but headcount growth is being measured. Increasing staff in some areas of the company will likely mean downsizing elsewhere.

For example, Meta CEO Mark Zuckerberg told investors that when it comes to artificial intelligence, “we’re playing to win here and I expect we will continue to invest aggressively in this area to build the most advanced clusters.”

Later in the call, when asked about expanding headcount, Zuckerberg said the new hires will be “relatively minimal compared to what we would have done historically,” adding that “I kind of want to keep things lean.”

Olsavsky said most Amazon teams are “trying to maintain control over headcount, perhaps reduce headcount as we can increase efficiency in the size of our business.”

The story is unfolding across Silicon Valley. January was the busiest month for tech job cuts since March, according to the site Layoffs.fyi, with nearly 31,000 layoffs across 118 companies. Amazon e Alphabet added to 2023 job cuts with more layoffs last month, as it did Microsoftwhich eliminated 1,900 roles in its gaming unit shortly after closing on its acquisition of Activision Blizzard.

This week’s downsizing hit the cloud software market, where Okay announced it would cut about 400 jobs, or 7% of its staff, and Zoom in confirmed that it was eliminating less than 2% of its workforce, amounting to nearly 150 positions. Enough announced a plan to cut 8% of its jobs, or nearly 125 positions based on the most recent headcount data.

Evan Sohn, president of Recruiter.com, called it a “very confusing job market.” Last year, technology companies were responding to sharply changing market conditions – rising inflation, rising interest rates, the absence of risk – after a prolonged bull market. Meta cut more than 20,000 jobs in 2023, Amazon laid off more than 27,000 people, and Alphabet cut more than 12,000 positions.

Today the economy is in a very different situation. Growth is back at a strong pace, inflation appears under control and the Federal Reserve indicates that rate cuts are on the horizon this year. Unemployment held at 3.7% in January, down from 6.4% three years earlier, when the economy was just reopening after pandemic lockdowns. And nonfarm payrolls increased by 353,000 last month, the Labor Department’s Bureau of Labor Statistics reported Friday.

Technology stocks are booming, with Meta, Alphabet and Microsoft all at or near record levels.

But the downsizing of the sector continues.

“Companies are still cleaning up since ’23,” Sohn said on CNBC’s “Worldwide Exchange” this week. “There may be a reversal of skills, different skills needed to really manage the new world of 2024.”

Wall Street is rewarding tech companies for better liquidity discipline and deployment, but it raises the question of where they can turn for meaningful growth. Of course Nvidiawhich had a banner 2023 due to surging demand for its AI chips, none of the other mega-cap tech companies grew at historical average levels.

Meta’s better-than-expected 25% growth for the fourth quarter is also a bit misleading, because the comparable number from a year ago was depressed due to the slowdown in the digital advertising market and Apples iOS update, which made targeting ads more difficult. Finance chief Susan Li reminded analysts Thursday that as 2024 progresses, the company will “expect periods of increasingly stronger demand.”

By the end of this year, analysts expect Meta’s growth to return to high teens levels at best. Growth estimates for Amazon and Alphabet are even lower, a good indicator that calls for capital allocation measures may only get louder.

Ben Barringer, technology analyst at Quilter Cheviot, told CNBC that Meta’s decision to pay a dividend was a “symbolic moment” in this regard.

“Mark Zuckerberg is showing that he wants to bring shareholders with him and is emphasizing that Meta is now a mature, adult company,” Barringer said.

— CNBC’s Annie Palmer contributed to this report

CLOCK: Meta’s fourth-quarter report suggests it’s making the most of Nvidia’s chips