Microsoft layoffs a 'rip the Band-Aid off' moment: Analyst Dan Ives

Microsoft (MSFT) announced on Wednesday that it is cutting 10,000 jobs as the tech giant contends with slowing PC and cloud sales. But according to at least one analyst, the layoffs are a proactive move as Microsoft and its Big Tech counterparts are forced to reckon with the unsustainable growth they saw during the pandemic.

“It was a rip-the-Band-Aid-off moment from Nadella and Microsoft, and we’re seeing it across tech,” Wedbush analyst Dan Ives told Yahoo Finance Live. “These companies were spending like 1980’s rock stars at a pace that was unsustainable.”

Big tech companies like Microsoft, and Amazon (AMZN), and Meta (META), which laid off 18,000 and 11,000 employees, respectively, rapidly expanded their staff during the pandemic to keep up with demand. Between June 2021 and June 2022, Microsoft added some 40,000 jobs. Meta, meanwhile, added 13,366 jobs between Dec. 2020 and Dec. Amazon added 310,000 in the same time frame.

While Microsoft’s layoffs will result in a $1.2 billion charge, equal to about $ -0.12 per share, Ives says the move was prudent.

“I view it as a proactive, smart move that we’re going to see across tech. Ultimately, I think as we go into earnings, this is going to be a positive that really preserves margins,” he said.

As for whether the layoffs are a harbinger of more trouble ahead of Microsoft, Ives said he believes the company is likely in a better position than most others.

“They’re going to double down on cloud, they’re going to be aggressive with innovation,” he said. “We’ve seen in terms of OpenAI and some other technology partners…Nadella is going to be aggressive and spend, and I think hire in areas where strategically that’s where Microsoft is going to be for the coming years.”

At the moment, however, Microsoft is dealing with a decline in cloud revenue growth. In October, the company reported that it expects Q2 cloud growth to decrease. And in Q1, cloud growth declined from 31% year-over-year in 2021 to 20% year-over-year.

PC sales are also slumping as consumers who purchased new systems during the pandemic have no need for new ones and businesses hold off on buying new machines at a time of high inflation and interest rates.

Outside of its cloud and PC sales performance, Microsoft is also working to ensure the success of its $69 billion acquisition of Activision Blizzard. The deal is currently facing pushing back in the U.S., U.K., and E.U., but Ives says he believes it will go through.

“I think Microsoft does ultimately become victorious there,” he explained. “That’s why they’re not backing down…That’s and asset, and I believe there’s going to be more M&A from Microsoft and from others in Big Tech.”

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