Key takeaways
- Tesla have announced layoffs to 10% of their workforce with Coinbase also laying 18% of theirs
- It’s the latest in a string of headcount reductions, particularly in the crypto sector
- These layoffs are being made on the assumption that a recession is around the corner, but it’s still a coin flip as to whether we’ll actually see one
- After huge falls in 2022, the tech sector is looking undervalued, which could lead to opportunities for investors
Elon Musk appears to be following through with his recent announcement to lay off 10% of Tesla's workforce, with several employees already given their marching orders. Tesla isn't the only high-profile company to announce such a move, and the prospect of a 'crypto winter' is seeing that sector heavily impacted.
A string of big names in the crypto industry have announced layoffs, including Coinbase slashing their workforce by 18% and BlockFi by 20%. Even Crypto.com, the same company that recently paid an estimated $6.5 million for a Super Bowl ad spot and signed a $700 million deal to rename the Staples Center, stated its plan for a 5% reduction to its workforce.
All in all, it appears to be a continuation of the bad news for the technology sector. But does this negative sentiment suggest that worse is still to come, or is the industry starting to look a bit undervalued?
Why is Tesla laying off workers?
Tech sector stocks have been getting smashed , which you probably already know unless you've been hiking in the Himalayas with no cell reception for the past six months. Almost every company in the industry has seen massive value wiped off its market cap since the beginning of 2022. Amazon's down over 35%, Meta is down around 50% and even Apple is down over 25%.
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Tesla has experienced a phenomenal increase in its share price over the past few years, and it's now also going backward just as quickly. So far this year the stock is down over 40%, and the leaked internal memo from Elon Musk stating he had a "super bad feeling" about the economy hasn't done anything to help.
It's in this same internal memo that he announced that Tesla would be laying off 10% of its workforce. With employee numbers that hover around 100,000, this could mean 10,000 workers being shown the door.
So why are they doing this? Cutting headcount at a company is one of the main ways companies look to manage their costs when times are tight. Not only do they save on salaries, but also all of the associated costs such as pensions, healthcare and even physical office costs.
With the S&P 500 officially entering a bear market on Monday, Elon Musk may be surmising that by pre-empting a potential recession, he can reduce Tesla's costs while avoiding a last-minute slash and burn.
Download Q.ai today for access to AI-powered investment strategies. When you deposit $100, we’ll add an additional $50 to your account. Crypto winter causes Coinbase layoffs
If things look a bit dicey in tech, it's practically the Roaring 20s compared to the world of crypto. Apart from some minor respite in early March, Bitcoin has been falling since November last year and shows no signs of slowing down.
Ethereum is suffering just as badly, if not worse, and thousands of other coins and tokens are in danger of disappearing altogether. This massive selling pressure is causing havoc in the sector, with many trading platforms and network operators struggling to stay afloat.
First came the collapse of popular crypto projects Terra Luna and Terra USD, which evaporated $42 billion of investor's money practically overnight. DeFi network Celsius has been the most high-profile apparent casualty in recent days, pausing all withdrawals and transfers from the platform amid liquidity concerns.
That's terrible news for an industry that is equal parts highly leveraged and built on trust in the networks and blockchains that support the coins and tokens. Celsius hasn’t collapsed yet but it’s obviously got problems.
With such massive issues in the sector, it's not really that surprising that mass layoffs are on the cards. Companies like Coinbase and BlockFi are struggling to sure up their balance sheets, and reducing staff numbers will allow them to do this quickly.
Coinbase announced its layoffs through a blog post from its Chief Executive and Co-Founder, Brain Armstrong. He shared a similar opinion to Elon Musk, that the economy was looking likely to be heading towards a recession, and added that it could lead to a crypto winter. This is a term used in crypto circles to signify a dramatic and sustained fall in prices.
As an exchange that facilitates buying and selling cryptocurrency, Armstrong explained that previous crypto winters had seen a significant decline in trading revenues and that this had put considerable strain on company finances.
He also stated that Coinbase "grew too quickly" during the frothy bull market of 2021 and that it had since become clear that they had over-hired during this frenetic period.
Put simply, with lower crypto prices comes less media coverage and general interest. This leads to reduced income for companies in the space, which forces them to keep their costs down to try to remain profitable or at least minimize their losses.
Do layoffs mean a company is in trouble?
Not necessarily. Layoffs never make for good headlines, but it doesn't always mean the alarm bells are ringing. It's common for companies to go through phases where their payrolls become a bit bloated. This is easily overlooked when the economy is booming and revenues are rising, and a downturn can provide an opportunity to review the efficiency of the workforce.
Reducing employee numbers may not always be enough to maintain profit margins throughout a recession, but it can help limit the damage. It can also help the business to bounce back strongly once income recovers.
However, this isn't always the case, and sometimes layoffs signal some big problems within a company. As with most things to do with investing, there's no way to tell for sure which way the situation will play out until after it's already happened.
A recession is not a certainty
With all this glass-half-empty talk from some big-time CEOs, you'd be forgiven for thinking that a recession is a done deal. In reality, it's far from it. A recent Bloomberg survey of 37 economists has the probability of a recession at 30%. That's slowly trending up, but at the moment, they're not bad odds.
Bank of America recently released commentary that also supports a more optimistic viewpoint. Their Chief Financial Officer, Alastair Borthwick, revealed that consumer spending is up 9% in the year to June and that they are seeing "reasonably strong loan growth." This would suggest that economic activity isn't completely stalling, despite some uninspiring recent GDP growth figures.
What do layoffs mean for investors?
Many of the layoffs in the crypto sector won't impact regular investors at all because companies like Crypto.com and BlockFi are privately owned. Tesla and Coinbase, however, are listed companies, and investors in the stocks have already seen their values plummet so far this year.
In isolation, the layoffs don't change the company's fundamental position or the investors' prospects. It will help the companies reduce costs, which is usually a good thing. However, it can increase workload and pressure on existing employees, potentially leading to other problems down the line. Again, the impact of the layoffs on the bottom line for Tesla and Coinbase will remain to be seen.
We can say that a recession wouldn't be good news for either of them. Elon Musk and Brian Armstrong are calling a recession early, and if they're right, this will put further pressure on the income for their companies as well as many others. With less money going around, fewer people will buy Tesla's, trade crypto, buy sneakers or go on vacation. This reduced spending potentially leads to further layoffs and pay freezes, which creates a spiral of even further reduced spending.
For investors, it can create the need to be more specific with investment selection. In the words of Mark Cuban, "Everyone's a genius in a bull market." With everything going up, investors can afford to pile into stocks and crypto projects without too much concern over the fundamentals.
When times get tough, it's not that easy. There are a number of ways to approach the issue. At Q.ai, we know there are some potential headwinds on the horizon, so we've created several investment Kits that aim to protect against, and potentially even profit from them.
If you’re on the same page as Elon Musk and Brian Armstrong, you could consider our Large Cap Kit. In times of low or no economic growth, large companies tend to outperform smaller ones. With this Kit, we use AI to rebalance a long/short trade on a weekly basis, which seeks to take advantage of this performance gap.
If you’re feeling more optimistic about the tech industry in particular, we've just released our Tech Rally Kit. Tech stocks have copped a hammering lately, and we think it may have gone a little far. In our view, the massive falls in tech stocks have started to make them look undervalued, especially when compared to more traditional companies which have generally been holding stronger so far in 2022.
Tech Rally uses ETFs to create a long/short position that aims to take advantage of the valuation gap between the tech sector and the Dow Jones, home of old-school companies like Johnson & Johnson, Caterpillar and Boeing.
Both of these Kits are offered on a Limited Edition basis, and we'll only keep them open for as long as the opportunity remains.
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