Motley Fool Money - Are Job Cuts A Sword Or A Knife?

Episode Date: January 11, 2024

(00:21) David Meier and Deidre Woollard discuss: - The macro and micro of job cuts. - What companies are signaling when layoffs happen. - If bitcoin is more like an IPO or gold. (16:46) What is the snap test? Alicia Alfiere and Ricky Mulvey explore this vital way of considering companies. Companies discussed: CRM, GOOG, GOOGL, AMZN, BLK, RENT, SNAP, NFLX, COST Claim your Epic Bundle discount here: www.fool.com/epic198 Host: Deidre Woollard Guests: David Meier, Ricky Mulvey, Alicia Alfiere Producers: Mary Long, Ricky Mulvey Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Willard here with Motley Fool analyst, David Meyer. David, how are you today? I'm doing very well. How are you? Good. We've got Sun.

I'm happy about it. Wanted to talk to you this week about job cuts because this year has kicked off with a lot of cuts. And I'm kind of surprised by it, but we've got Amazon, Unity Software, BlackRock, Rent the Runway, Google, even Xerox. So last year to me felt like the year of the big layoff. This year, maybe the small layoff. What's happening here? Time will tell if we're going to find out if this is a new round of bigger layoffs or if this is just sort of ones they didn't get to, companies didn't get to in 2023.

Because if we go back and think about what was being communicated in 2023, a lot of the growth in tech companies slowed. and the push for profits and cash flow increased. So that leads me to believe that, hey, if there's any, you know, now's the time when companies are finalizing their budgets and getting ready for the next year. So if companies are rationalizing their growth plans where investment dollars are being cut, unfortunately, there's a good chance labor dollars have to get cut with it, right? You need to match.

That's the idea of matching your potential revenue with the potential expenses. So, you know, so we'll see what happens, but obviously a lot of announcements to start the year. And the question I'm asking myself, is it iterative? Is it incremental? Are we sort of like honing our focus here? It's kind of hard to know. And the other thing I'm kind of juxtaposing that with is the macro. So I chatted recently with Lizanne Saunders from Schwab. We're going to have her on her Saturday's show. And she said that some companies might be hoarding labor. So there's this kind of conflicting data between the macro. Job numbers are still strong, but we're also seeing all of these little layoffs.

So how do we balance all of that? Yeah, that's it. That is an excellent point you've made and an excellent question. So as a bottom-up investor, what I'm trying to stay focused on is what the companies are saying and doing, more so than the higher-level data. And that's because first and foremost, what I'm trying to figure out is if a stock is attractive or not. And that starts with company data. But as you so rightly pointed out, we have to pay more attention to the macro data because what that does is it helps us understand the type of investing environment that we're in.

And to your point, right now the data from a company level versus the higher level data seems to be a little bit conflicting. Unemployment is still very low, and that's even as interest rates have been rising. So right now, with overall good employment, we have wages that have gone up, we have the rate of inflation falling. That seems to be good for the economy and should be good for stocks. However, we need to evaluate what's happening at a company level in order to figure out if the particular stock we're interested is attractive or not. Yeah, that's such a good point because,

some of the companies I mentioned, there's a big difference between your an alphabet versus your rent the runway. These are just very different types of companies. 100%. Yeah. And so all of that really is interesting when you think about this because you've got the overall macro and then you've got the sort of underneath of like, okay, there's a lot of layoffs. And then you've got the layer deeper and you talked about being a bottom up investor. You know, it's always conflicting for me because as an individual, I hate layoffs. I mean, I was a victim of one way back when I worked at AOL, and there were a few more before me, and it was, it was painful. But as an investor, I kind of have to look at this, and sometimes I see the stock go up, and I have to think about this

from a more kind of impersonal standpoint. So what kind of questions are you asking yourself? So I have fortunately not been in a layoff, although I have seen them happen around me at some companies that I used to work for, so I can completely empathize with what you're saying. But as an analyst, the main thing that I want to know is, is this decision consistent with what management's outlook going forward is? Or if it's inconsistent, is what we're seeing a sign of potential problems ahead. So as an outsider, right, as an outside investor looking in at the company's data, I'm not privy to. to the internal conversations that happen about these things.

So they can be made for a variety of different reasons. But it's important for me to think about the decision relative to the strategy and the tactics that the company is communicating. And again, it's about consistency. Like, tell me, does this make, does the decision that you're making make sense with where your business is headed? Well, that's such a good point too, because I look at the press releases. I used to work in PR.

So I understand PR speak a bit. But, you know, and I look at this, like with BlackRock, they were talking about. We're doing these layoffs, but that's because we see, you know, more money going toward ETFs. We look at Amazon and Google, and they each have a reason that is interesting. So with Google, they're laying off some of the people around the Google Assistant, but they're also putting more energy into it. And with Amazon, you've got cuts in Twitch. You've got cuts in Prime Video. MGM studios, maybe that's indicating cost of content. So these are small, little niggly moves in

these massive behemoths, but what are they also signals not just about the job cuts like, hey, we need to balance the budget, but also, hey, we're going in a different direction, and that's why this is necessary. Oh, so we're bringing in another variable here. That's what you're telling me. But again, your point is spot on. And again, I'll go back to the consistency question. So let's use Google's announcement as the example to walk through here. There may be costs and benefits of the work that needs to go into maintaining and improving Google Assistant at this point in its lifecycle, right? But you could argue that that technology is probably matured.

And if it's matured enough, it may need a different amount of labor. to do the maintenance and incremental innovation that's required to keep it going. So, you know, one thing could be, hey, I don't need as much direct labor making these big leaps and bounds in terms of technological innovations. Maybe I need less labor and more AI in order to have a better control of my costs that keep that service, keep that service. service up and running and interesting for the people who are using it on their phones. Yeah, space we start to wonder if we don't know if these are AI related cuts and, you know, everyone's looking for that. So it's sort of tricky where we're at right now in the cycle.

But I think that point is, again, spot on. You know, these are the types of things that I think people don't necessarily appreciate in terms of what AI can do. It's not just, hey, I'm going to revolutionize the way we do business, right? It's also, I can, like, if I can assign AI to do tasks and be more efficient at tasks that I need done, companies are going to do that. That's one way you get a scale advantage in your labor, unfortunately, is to reduce labor and get more output as a result of that labor using technology. Well, and then that, you know, you have to balance also the optics of this, you know,

coming back to the PR. So, you know, Google announced this and immediately there were, there was a tweet from the alphabet workers union saying, you know, these small cuts are, they're unnecessary for a company of this size. And then you had another story that was sort of like an almost job cut from Salesforce. So Fortune had this story of Salesforce might be freezing hiring. And so, you know, then Salesforce had to come out and say that, you know, they're strategically hiring, which is interesting because Beniof has been CEO Mark Benioff of Salesforce, you know, big job cuts last year. Then their last earnings call, he seemed to be like throwing open the door saying, AI is making us, boom, we're hiring. So how do you like to see companies handle

some of these really tricky optics? Be consistent. Yes, please. So I think, If we look at the context, focus on Salesforce and Mark Beniof here, and we look at the context. Look, Mark Beniof is a promotional CEO. He loves to grow. He loves to talk about his company. He loves to talk about the culture within Salesforce. And there's nothing wrong with that, okay? But as a mature company, you know, if growth is picking up and your company needs more labor

to execute and capture that growth, then you can talk about hiring. There's no problem with that. But if growth is slowing down and your company needs less labor as a result in order to provide a return to shareholders, look, that's not a fun story to tell. And, you know, Mark Banyhoff doesn't want to tell that story, right? That's just not who he is as a person as a CEO. But it's the right one to tell. So, you know, again, just be consistent.

Try to be rational here. And again, for me as an analyst, I'm looking for that consistency. I want to make sure there is a match between what you're saying, what you're doing as a company, and why you're doing it. If there's a mismatch, that leads to more questions. Yeah, yeah. The consistency is so important. I'm going to switch topics a bit because yesterday on the show, Dylan and Jason, they talked

about the SEC's approval of spot Bitcoin ETFs. They were waiting to hear the official announcement because it hadn't come out when they did the show. Now we've got Gary Gensler, of course, head of the SEC and his statement. There was a phrase that stuck with me that the SEC doesn't really approve or endorse Bitcoin. And they said, you know, investors need to remain cautious. So I read that as the SEC kind of, they kind of had to do this.

What do you think? What's your take? Once the idea for a Bitcoin ETF got started and got support for the support for the US. from the various service providers that were going to make this happen, it was an envelope. The momentum was not going to stop. And it was not going to be a case where, no, we're just not going to do this. And so what I think the SEC has been trying to do in this quote-unquote negotiation phase before the approval phase is figure out how they can get best organized in order to provide

some sort of oversight. The gravitational pull of Bitcoin is very strong. And the opportunity for service providers to make incremental revenue fee that could actually be really, really big is also strong. So, look, it was going to happen sooner rather than later. That's always been my feeling. Well, now it's happened. We've got a potential 11 of these coming to market. So the frenzy is on.

got the Grayscale Bitcoin Trust and the I shares Bitcoin Trust. Those were first out of the gate. Early trading went way up. We know people, there's pent-up demand here, right? There's going to be this flurry of excitement. I think about this sort of like, is it more like an IPO where I want to watch, maybe wait a year, see how the market, you know, the market, the way the market works on a company? Or is it more like a gold ETF or something like that? How do you, how do you you think about the comparison here? So this is an excellent question, and one I had to think quite a bit about. But I think I lean towards the IPO approach that you just mentioned and think it's best

to wait and see how lots of things shake out, and how, especially how the market for Bitcoin actually responds, right? I mean, the potential for, you know, how is this all going to work? because if there is all this potential demand that wants it, what's going to happen to the Bitcoin, well, I guess it's not a security yet. The Bitcoin asset, how it responds. So, yeah, what I'm really looking for is to see just how much institutional demand there is for this ETF, because that's who they're targeting.

It's difficult for many institutional investors to actually invest in Bitcoin itself. This provides them a way to do that. And to your point, between this one being approved and 11 more right behind it, look, we know there's demand. Otherwise, I shares wouldn't have been pursuing this product, right? It just remains to be seen how much there is. So I think the key to making any decision about whether or not you want to buy this ETS, early on, is you have to have some way of handicapping that demand, as well as a way of figuring

out what's the potential impact of that demand on the asset itself, Bitcoin. I thought of it like an IPO and then I went back to maybe it's more like gold because with an IPO, you have the revenue potential. You have the story emerging. With Bitcoin, you've got a price. Like, there's not, there's not, there's fewer variables there. That's an excellent point. The comparison is not perfect, right? Because we don't have an asset, which is a company, which we have plenty of, if you go through the IPO process, now we have all of the financial statements, right? We have all of the information that gives us insight into what this company is going to do and how it's going to do it and how it's going to grow,

etc, etc. We just don't have that with an asset like Bitcoin. But in the other hand, it is all about price. I mean, that's really it. It's supply and demand. Supply is for now, right, held constant, and we know demand is there. So, you know, the implication is price go up. So it's difficult, but unlike gold, I think this approach, the wait and see approach is better because I think there'll be a lot more volatility in Bitcoin than they're likely be with something, a commodity like gold. Yeah, yeah, I think that makes sense. Thanks for breaking this down with me today, David. Thank you, Deidre. These days, I'm all about quality over quantity, especially in my closet. If it's not well-made and versatile, it's just not worth it. That's honestly what I love quince.

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Quince.com slash mrs. Molly. We talk about a lot of stocks on the show, but it's just a peak at the Motley Fool's investing universe. This year, we're rolling out a new offering. It's called Epic Bundle. The service includes seven stock recommendations every month, model portfolios, and stock rankings, all based on your investor type. We're offering Epic Bundle to Motley Fool Money listeners at a reduced rate as a thanks for listening to the show. So, for more information, head to www.fool.com 198. We'll also include a link in the show notes for you. One of the most powerful questions that investors can ask doesn't involve any math. Ricky Mulvey caught up with Alicia Alfieri

for an introduction to the Snap Test and apply it to a few companies. Alicia, I think this is a foolish sort of test for a company, but I think it's a powerful question that anyone can and maybe should ask before buying a stock. It's called the Snap Test. So to set the table, can you explain what the question is and how it works? Yeah, definitely. So the snap test is from David Gardner. And so for fans of the Marvel universe, it's essentially the Thanos test, which means if you snap your fingers and the company is gone, would people be angry? Would they notice? So it's shorthand for figuring out if a company has an incredible moat or a competitive advantage. And sometimes, again, to help you think structurally about a company. Is there competition? Are there adequate substitutes? Can anything be, rebuilt with time and effort, of course, but would the loss of a thing drive the need to rebuild? But I would also caution you and say that it's just a piece of the puzzle for investing. Yeah, it's not one question you can ask and then move on.

But it would be easier if it was that way. I think the obvious company to apply it to would be Snapchat because it's one of those things where you can talk about very necessary companies where if they shut down, things would go very, very awry, but also with a company like Snapchat, if that was immediately shut down, you would have a lot of upset people who could not communicate with their friends. You would. And perhaps I have a bit of a hot take here, because I do think, so for those who are unfamiliar, the Snapchat app is an app that allows for visual messaging, and it is wildly popular.

So in the third quarter, 406 million global users and over 5 million subscriptions. to Pew Research Center report, Snapchat was one of the most widely used online platforms for teens. Here's the problem, though. I do feel like there are a lot of social media apps, and therefore, a lot of substitutions. So if this company were to be snapped away, would its users miss it? Yes, I think so. But I don't think they would have to really wait long before turning to TikTok, Instagram, maybe even the old school Facebook, or what's up? Turning. Yeah, I think they would figure something out.

I don't know about Facebook. I think that's one of my favorite takes is I don't use Facebook anymore. I'm just on Instagram. It doesn't really work. I did have, I was working with this, I was talking to a teenager for this volunteer thing. And he told me that he is on Snapchat because, and he lets everyone see his location. And the reason he does that is because what if you were dying and you needed someone to come save you? And so he allows every single person that he's ever met in high school to see his location at all times.

Wow. The social dynamics with Snapchat, there's a lot of hurt feelings because people can see if their friends are gathering without them. It is terribly unhealthy. Yeah, yeah. Okay, so maybe not Snapchat, but how about Netflix? That's something that people have been snapped, especially over last year when Netflix started cracking down on password sharing. A lot of people understood, like, oh, I'm a little upset. I'm not getting my Netflix right now.

So Netflix is just about everywhere, right? Streaming content in over 190 countries with content in lots of different. different genres and languages. 247 million paid subscribers at the end of the third quarter. And it's still the only major peer play streaming content provider, right? It was incredibly disruptive to the old way of watching and distributing content. And it did so well that, as we know, a lot of companies tried to copy the model. It has an incredible amount of content that continues to resonate with its users. So I was reading about a Nielsen study. and they looked at the U.S. watching habits for the first 38 weeks of 2023.

And Netflix had the most watched original series for 37 of those weeks and the most watched movie for 31 of those weeks. So we're talking about something that really resonates with people. So it was also found that it was more than all of the other streaming services and platforms in terms of screen time except for YouTube. But the SNAP test. Several years ago, when it was mostly just Netflix in the space, the company could easily pass over that hurdle for the SNAP test.

It's a little bit more complicated now. There are plenty of substitutes, Disney Plus, Apple TV, Amazon Prime, Hulu, and others. But we can argue about whether those are actually adequate substitutes for Netflix, right? Netflix changed the way we consume entertainment. and it's still the largest streaming service out there. So I think that this one passes the SNAP test for now, though maybe not in another few years, if others can catch up. Yeah, when I think of the SNAP test, I think SNAP, Netflix, those are some fun ones,

but then there's ones where the world would be seriously damaged if these companies wouldn't exist. And for that, my mind kind of goes to a lot of the semiconductor companies, whether it's Taiwan semiconductor, which manufactures the chips, or ASML, which manufactures, the machines that make the chips, if either of those companies went away, there would be very serious problems for the fragile civilization we live in. Yeah, no, that's absolutely correct, because we're talking about semiconductors are vital to electronics and to your everyday life, and that's not at all being hyperbolic. It's true. And we're talking about companies that are important in terms of the supply chain of those electronic goods. So definitely those would pass the snap test. So we've associated, and you mentioned this earlier where you said, just because you passed the snap test, it doesn't mean that it's an attractive stock for an investor.

Let's put that to practice then. So what are some companies that you think maybe past the snap test? The world would go awry. It would be very difficult if these companies didn't exist, but you're not running out to buy those stocks. Well, everything in context, right? It depends on individual companies. But I would say that the sector where this would be the case would be the utility company sector. So we know if the electrical grid in your area were to disappear, that would be a massive problem.

But that doesn't mean you would want to invest in a company. So as with everything, it depends on the individual company and circumstances. But these companies often have a fair amount of debt. So the utility industry is one of the most leveraged. And that's because it has this requirement to maintain, and build infrastructure. A lot of these companies pay a dividend, but if a company is taking on too much debt and burning cash, it can put their ability to pay dividends at risk. And if that's your reason for investing in one to have the dividends, you're going to run

into some trouble there. And they've also run into some trouble with the comps now as interest rates rise, and a lot of the utility companies were paying a healthy dividend. That becomes a little bit less attractive if you can get a United States, literally risk-free investment for four or five percent. Right. And it might sound crazy that a utility company would suspend or cut their dividend, but it has happened. Last year, a utility company called Algonquin Power and Utilities actually cut their dividend, something like 40 percent, to shore up their finances. All right. So to add even a little bit more nuance, maybe there's a company you like that

completely fails the snap test. But, you know, but maybe has historically been a good stock. One example I talked about recently with Bill Barker on the show was Crocs. I think that's a company that for the past few years, it's beaten the market. If one did not have crocs in existence, people could find alternate footwear, clog, sandals, that kind of thing. Yeah, definitely. So for me, it would be Costco.

Really? Yeah. That would be a very painful loss if I didn't have Costco. It would be for sure. So we know they pioneered the membership warehouse club, keeps customers coming back, member retention rate in the 90% range, continues to grow, generate cash. But there is a lot of retail competition, and there are substitutes in the space, right? Like Sam's Club.

So if you snapped it away, it's members, including me, and I'm guessing you, would definitely feel the loss and be sad about the, particularly the loss of those bargain hot dogs. But competitors could come in to fill the gap. If you're a Costco member, you could still get groceries. You could still get tires somewhere else. It would be incredibly annoying, and I wouldn't like it very much. Right. Lish Outfieri, thank you for your time and your insight.

Glad to be here. As always, people on the program may have interest in the stocks they talk about. And the Motley Fool may have formal recommendations for or against. So don't buy ourselves stocks based solely on what you hear. I'm Dieter Willard. Thanks for listening. We'll see you tomorrow.