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Analysis | Big Tech Investors Are Done With ‘Science Projects’

Remark

Falling stock prices and slowing growth have the biggest tech companies – and investors – thinking about what it takes to turn their fortunes around. Finding new, lucrative sources of growth is the preferred way out, but it’s hard to find opportunities big enough to move the needle when your revenues are already in the tens or hundreds of billions of dollars a year.

That makes cutting costs the most obvious way to increase profits, an inconvenient option for an industry that hasn’t had a major belt-tightening phase in 20 years. After investors expressed dismay at technology companies’ lack of cost containment in the third quarter, management teams seem to have changed their minds. In the past two weeks, both Facebook parent company Meta Platforms Inc. as Amazon Inc. began laying off staff, with plans to cut about 10,000 jobs each in different departments. Earlier this week, a major investor in Alphabet Inc. that company also push for meaningful cost savings there. (Elon Musk cut about half the workforce at Twitter Inc. after his acquisition, but that’s another story.)

Investors are particularly irked by what might be termed the “science projects” that many big tech companies are pursuing, draining billions in capital without contributing much to revenue. Examples include Amazon’s spending on side projects like Alexa, which is believed to account for more than $5 billion in annual losses, and Alphabet’s investments in its self-driving vehicle unit, which has racked up $20 billion in losses to date. . At Meta, Mark Zuckerberg staked the future of the entire company on the development of new virtual and augmented reality products, changing the company’s name to distract its identity from its core social media business. Meta’s Reality Labs unit has lost nearly $10 billion so far in 2022. Zuckerberg apologized for ramping up investment too quickly when he announced the job cuts. higher valuations, these moonshot type investments made more sense. Investors valued technology companies more for growth than for profitability. At one point, Alphabet’s self-driving division was seen as worth $175 billion, suggesting that these large-scale non-core divisions incubated within the larger companies could pay off. Profit margins in core businesses were generally stable or expanding at a time of strong revenue growth, indicating almost unlimited resources to pursue ideas that could one day become as big and profitable as Google Search, YouTube, Facebook , Instagram or Amazon Web Services.

A few years later and the world has changed. Interest rates are no longer zero. Core markets have matured and in some cases are feeling the effects of slower economic growth. The combination of slowing growth and rising costs has put pressure on profit margins. The investor base these companies now have cares more about profitability and returning cash to shareholders than big bets on the future.

And perhaps most importantly, having collectively spent tens of billions of dollars a year on scientific projects, these companies don’t have much to prove in terms of revenue-generating activities. It is now unclear whether companies that have grown into huge conglomerates are nimble enough to turn nothing into something. That’s perhaps a job best left to startups and more focused smaller companies, with investors more inclined to take that kind of risk.

Even if these companies technically have the means to endlessly spend money on endeavors that may never pay off, that is not very macroeconomically efficient at a time when inflation is high and there is still a high demand for technical employees. Meta and Amazon and Alphabet are essentially hoarding engineers at a time when banks, insurance companies and the government need engineers too.

Conversely, appeasing investors by winding down these money-losing divisions could also be the spark Silicon Valley needs for the next wave of innovation. While it’s hard to quantify, it seems like the well there has run dry a bit lately; It’s been a while since the emergence of a startup on the scale of Uber Technologies Inc. or Airbnb Inc. The hoarding of labor by big tech may be partly to blame.

In any case, investors no longer care about these non-core assets. The companies have, at best, a spotty track record of proving they’re worth doing, and the rest of the economy remains hungry for tech talent. It’s time to admit defeat and move on.

More from other writers at Bloomberg Opinion:

Mass layoffs in Big Tech are a mistake of the old guard: Stephen Mihm

Big Tech’s Big Fired Apology Rings Hollow: Parmy Olson

Tech’s Terrible Week Told in 10 Charts: Tim Culpan

This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist. He is the founder of Peachtree Creek Investments and may have a stake in the areas he writes about.

More stories like this are available at bloomberg.com/opinion

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