Wednesday, February 28, 2024

Silicon Valley Confronts the End of Growth. It’s a New Era for Tech Stocks.

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Silicon Valley could use a reboot. The biggest players aren’t growing, and more than a few are seeing sharp revenue declines. Regulators seem opposed to every proposed merger, while legislators push for new rules to crack down on the internet giants. The Justice Department just can’t stop filing antitrust suits against Google. The initial public offering market is closed. Venture-capital investments are plunging, along with valuations of prepublic companies. Maybe they should try turning the whole thing on and off.

The only strategy that seems to be working is to lay people off. Tech CEOs suddenly are channeling Marie Kondo, tidying up and keeping only the people and projects that “spark joy,” or at least support decent operating margins. Layoffs.fyi reports that tech companies have laid off more than 122,000 people already this year.

Mark Zuckerberg, CEO of



Meta Platforms

(ticker: META), declared on a recent earnings call that this is the “year of efficiency.” He used the word “efficiency” more than 90 times (which itself seems inefficient, but never mind). What he means by efficiency is layoffs and spending cuts. Turns out, that’s exactly what Wall Street wants from a company that appears to have stopped growing.

This past week brought fresh evidence that cleaning house is the right strategy for 2023.



Zoom Video Communications

(ZM) rallied following its earnings report, which followed a 15% reduction in head count. Zoom, which in the midst of the pandemic posted three straight quarters with growth north of 355%, expects revenue to rise 1% in its January 2024 fiscal year. But profits will improve, thanks to all those ex-employees, who might now be video-chatting on FaceTime or WebEx.

We learned Wednesday that



Salesforce

(CRM) CEO Marc Benioff is an efficiency expert, too. Salesforce posted better-than-expected earnings, and his guidance for its January 2024 fiscal year featured much higher operating margins than the Street had expected. Credit the company’s 8,000 January layoffs—about 10% of its staff. Mahalo!

On Salesforce’s earnings call, a weirdly exuberant Benioff spoke of the need to press the “hyperspace button,” accelerating the company’s profitability goals. (He used the phrase “hyperspace button” four times on the call.) Apparently, when you hit the hyperspace button, 10% of your crew is ejected backward into deep space; that’s what propels you forward. He also said that Salesforce is “reigniting our performance culture,” perhaps a nice way of warning staff members that if the company doesn’t hit the margin targets, he could hit the hyperspace button again. You know what happens then.

The reason for this sudden preference for profitability and efficiency over growth is fairly obvious—there isn’t much growth. We might not be in a recession, but earnings reports from enterprise computing companies this past week made it clear that their customers want to do more with less.



Dell Technoliges

(DELL),



HP

(HPQ),



Pure Storage

(PSTG),



Box

(BOX),



Workday

(WDAY), and



Snowflake

(SNOW) provided disappointing outlooks for the year, citing customer caution and lengthened purchase-approval cycles.

Snowflake CEO Frank Slootman said that his company “saw a measure of bookings reticence with certain customer segments.” Box boss Aaron Levie told Barron’s that deal size has been hurt by customer concerns about the outlook. Pure Storage CEO Charlie Giancarlo said customers have been re-evaluating budgets in light of economic conditions.



Splunk

(SPLK) chief Gary Steele says customers are hesitating on new deals as they focus on cost control.

The largest techs have simply stopped growing. In the fourth quarter,



Apple

(AAPL),



Microsoft

(MSFT),



Alphabet

(GOOGL), Meta, and



Amazon.com

(AMZN) together grew a collective 1%. HP, whose name stems from the Silicon Valley legends William Hewlett and David Packard, the original two guys in a garage, reported that sales in its latest quarter fell 19% as the PC market remains in a post-Covid bust. Dell reported revenue down 11%—actually a little better than expected—but warned that things will get worse before they get better.

Salesforce, hyperspace button at the ready, provided January-quarter earnings that crushed Street estimates. But its growth story is fading. It sees revenue up 10% this year, the smallest annual amount ever.

The growth drought is widespread. PC demand, which boomed during the pandemic, has collapsed. The smartphone market has matured. So have the wireless services and streaming-video markets. Chip makers are slashing production.



Intel
’s

(INTC) revenue was off 32% in the latest quarter. Memory chip producer



Micron Technology

(MU) saw sales fall 47% in the November quarter; for the February quarter, the decline will eclipse 50%. Cloud-computing demand is still growing, but more slowly. Both Amazon and Microsoft say they’re helping customers “optimize” their cloud spending.

At the same time, tech CEOs have picked up the pace on handing cash back to shareholders via stock repurchases. (Layoffs free up cash, after all.) Meta announced a new $40 billion buyback program, lifting its total authorization over $50 billion, or more than 10% of its market value. Salesforce, which just a few months ago unveiled a $10 billion buyback program—its first—this past week boosted it to $20 billion.

Companies seem unmoved by the Biden administration’s threat to quadruple the tax on stock repurchases, to 4% from 1%. In any other year, companies such as Meta and Salesforce would be happy to use excess cash to shop for acquisitions, but the administration doesn’t like that, either.

While tapping the hyperspace button, Benioff zapped the company’s mergers and acquisitions committee, which has been officially disbanded. That’s a pretty big statement from a company that has spent more than $50 billion in recent years to buy Slack, MuleSoft, Tableau, and others. Analysts tend to think Benioff has an itchy trigger finger, but with five different activist investors holding positions and demanding he keep the you-know-what button close, he must play the cards in front of him.

On the other hand, pulling back from M&A is pretty easy now, given that the outlook for tech deals is grim under President Biden and the merger-despising leaders of the Federal Trade Commission and Justice Department. While the FTC finally gave up trying to stop Meta from buying Within, a tiny metaverse software company, regulatory concerns remain on a handful of pending deals, including Microsoft’s proposed acquisition of



Activision Blizzard

(ATVI) and Amazon’s deal to buy Roomba vacuum maker



iRobot

(IRBT).

Worsening matters, the IPO market remains shut, so venture-backed start-ups have no viable exit strategy. Venture-capital-backed firms raised $32.4 billion in 2022’s fourth quarter, down 14% from the total in the third. And the venture firms themselves have dramatically slowed their quest for new money. Ernst & Young says they raised just $7.1 billion in 2022’s Q4, versus $157.6 billion in the year’s first nine months.

Malcolm Harris lays out a controversial analysis of techdom in his edgy 708-page tome Palo Alto: A History of California, Capitalism, and the World. Harris grew up in Palo Alto, graduating from Palo Alto High School a few years ahead of my oldest kid. He recalls a day in fourth grade when a substitute teacher at Ohlone Elementary School (named after the Native American tribe that once lived here) told his class that they were living in a bubble, something the 10-year-olds didn’t understand. Parents complained, and the sub was fired, but the lesson stuck with little Malcolm, who’s still certain that Palo Altans do live in a bubble. As a 25-year resident, I can’t say he’s wrong.

Harris’ book covers vast territory, from the Gold Rush to Stanford University’s founding to the Theranos scandal and other recent events. A Marxist, he thinks the place has been tainted from its start by unbridled greed. In a recent interview, he called it “the town that efficiency built.”

Harris even argues that the best thing would be for Stanford to shut down, or move and hand over at least some of its 8,800-acre campus and roughly $37 billion endowment to the Muwekma Ohlone band.

Talk about hitting the hyperspace button!

The brouhaha over ChatGPT, Bing Chat, and other forms of “generative” artificial intelligence has rapidly reached the silly stage. Almost every CEO I talk with seems to be licensing technology from OpenAI, creator of ChatGPT.



Duolingo

(DUOL) is adding ChatGPT-based virtual chat features to its language-instruction software, which seems like a perfect use.



Booking Holdings

(BKNG) is creating AI-based trip planning; Instacart and



Shopify

(SHOP), OpenAI-based shopping apps. The list lengthens by the day.

Of course, OpenAI is controlled by Microsoft, which is including the technology in the new version of the Bing search engine. As I noted in a cover story a few weeks ago, a revitalized Bing poses a real threat to Google’s internet-search dominance. But Microsoft’s ownership position in OpenAI may be an even bigger opportunity.

Credit Suisse analyst Sami Badri has named Microsoft his top U.S. software pick. Monetizing OpenAI’s technology could add $40 billion in revenue and more than $2 a share in profits over the next five years, he argues. He sees a similar opportunity for



Nvidia

(NVDA), the leader in graphics processors for computer hardware used to train AI models. So he’s recommending two stocks to bet on one compelling tech trend.

What could be more efficient than that?

Write to Eric J. Savitz at eric.savitz@barrons.com

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