The recent announcement from Block (XYZ +16.82%) on Thursday evening sent ripples through the tech industry.
Under the leadership of Jack Dorsey, the fintech firm revealed plans to lay off over 40% of its workforce, attributing the decision to advancements in artificial intelligence (AI). Dorsey remarked, “The core thesis is straightforward. Intelligent tools have transformed how companies are built and operated. A considerably smaller team, leveraging the tools we create, can achieve more efficiently.”
Some investors expressed concerns regarding this strategy, pointing out that Block had increased its employee count during the pandemic and is now facing excess workforce issues. Following the news, software shares declined, mirroring apprehensions raised in a Citrini Research blog post that unsettled the market earlier in the week.
While layoffs can be common, cutting 40% of one’s workforce is particularly rare.
The iShares Expanded Tech-Software ETF dropped 1.3% in reaction to Block’s announcement and fell as much as 3% the next day. Conversely, Block’s stock surged, closing the day up 16.8%, having traded over 20% higher at one point.
This noticeable increase caught the attention of many tech CEOs, indicating that investors appear eager for layoffs in the tech sector, especially amidst falling stock prices.
Let’s explore a few other companies that might soon follow suit with layoffs.
1. IBM
IBM (IBM 0.74%) isn’t solely focused on SaaS, as it also maintains a substantial consulting arm. However, software does account for a significant portion of its operations, and the firm has been advocating for a leaner, asset-light model for some time.
Despite being an early player in AI with Watson, IBM has little to show for it since then. Nevertheless, the company reported its first quarter of double-digit revenue growth in over a decade in Q4, suggesting ongoing progress in its software domain.
International Business Machines
Today’s Change
(-0.74%) $-1.80
Current Price
$240.21
Key Data Points
Market Cap
$225B
Day’s Range
$234.56 – $240.21
52wk Range
$214.50 – $324.90
Volume
6.6M
Avg Vol
5.1M
Gross Margin
57.59%
Dividend Yield
2.80%
Given that IBM’s stock has declined nearly 25% in the past month, investors may be concerned about the impacts of AI disruption. With revenue per employee at a mere $240,000, significantly lower than that of other tech stocks, layoffs at IBM would likely be welcomed by the market.
2. DocuSign
Like Block, DocuSign (DOCU 1.37%) also underwent extensive growth and spending during the pandemic but hasn’t rebounded well.
The stock remains down over 80% from its pandemic peak and has faced a decline of more than 34% this year due to broader software market trends.
Today’s Change
(-1.37%) $-0.63
Current Price
$45.09
Key Data Points
Market Cap
$9.0B
Day’s Range
$43.46 – $45.46
52wk Range
$40.16 – $94.67
Volume
169K
Avg Vol
4.3M
Gross Margin
78.89%
DocuSign generates $450,000 per employee, and similar to Block, it could enhance its operations by adopting AI tools. A round of layoffs may positively impact the stock.
3. Zillow
Zillow (Z 4.35%) (ZG 3.70%) is also not a conventional SaaS firm, yet it shows signs of overexpansion following the real estate boom during the pandemic.
Today’s Change
(-4.35%) $-2.03
Current Price
$44.62
Key Data Points
Market Cap
$11B
Day’s Range
$44.26 – $46.25
52wk Range
$41.91 – $93.88
Volume
7.9M
Avg Vol
3.8M
Gross Margin
74.14%
Similarly, Zillow’s stock has faced a downturn lately, dropping 35% year-to-date. With revenue per employee currently at $350,000, layoffs could enhance its profit margins.
Why It Matters for Investors
Block’s decision highlights to software companies that investors may favor those who downsize, with AI serving as a justification for such measures.
Given that software companies spend the majority of their revenue on staffing, there is substantial leverage to be gained from layoffs.
For investors, a surge in layoffs could be seen as a positive indicator, as previous layoffs within major tech firms at the end of 2022 and start of 2023 helped catalyze a rebound in tech stocks.
While Block may be the first significant layoffs in the AI era, it is unlikely to be the last.
