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US companies are witnessing declining demand for their products and services as high inflationary pressures and rising interest rates hurt consumer spending. Moreover, the ongoing war between Russia and Ukraine has further increased investors’ concerns about the recovery of the global economy.
As a result, companies in a variety of industries, including technology, retail and media, have either begun layoffs or halted hiring in light of the looming recession. Over the past few months, tech behemoths have loved Meta Platforms (TARGET – free report), Amazon (AMZN – Free report) i Salesforce (CRM – Free Report) announced their layoff plans.
While a downsizing strategy can hurt employer brand and employee morale, it’s often a necessary evil that companies consider adopting in order to stay afloat during turbulent times. The layoffs announced by the mentioned companies do not mean that they are in bad shape. These organizations are leaders in their niches. So it’s wise to hold on to these stocks despite their unpopular workforce reduction initiatives.
Let’s see why the three stocks could recover once the macroeconomic and geopolitical winds subside.
Meta Platform: In early November, the social media giant announced its plan to cut its global workforce by 13%. The announcement came after the company reported poor results for the third quarter of 2022 in which adjusted earnings fell 49% and also missed the Zacks Consensus Estimate. Revenues managed to beat the consensus estimate, but fell 4.5% year-over-year.
Target is facing its worst decline in years, suffering from challenging macroeconomic conditions, which are affecting its advertising spending. Unfavorable forex, targeting and measurement hurdles due to Apple’s iOS changes, normalization of e-commerce after the peak of the pandemic and higher inflation are hurting Meta’s finances.
However, that doesn’t mean investors should switch META stocks. The company has carved out a lucrative niche in the social networking market. Meta has taken steps to encourage penetration into emerging markets in Southeast Asia, Latin America and Africa.
Of all places, India deserves special attention in terms of user growth. The second most populous country in the world offers enormous potential for the company. With China off the radar, India can prove to be a great growth engine for Meta. This is primarily due to a growing well-educated middle class, increasing spending power and rapid adoption of smartphones in the country. Meta’s investment in Reliance Jio is a step towards gaining a significant footprint in the country.
Furthermore, once the global macroeconomic and geopolitical headwinds subside, the company is likely to witness a strong rebound in advertising revenue, given its dominance in the social media market.
In addition, Meta is investing heavily in artificial intelligence (AI) technology, which will help build the metaverse as a commercial virtual reality (VR) independent of the real world. The move will also help the Zacks Rank #3 (Hold) company diversify its business and move away from being just a social media platform provider. You can see complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
VR technology is fast emerging as a lucrative business opportunity in which the company plans to invest more than $3 billion over the next 10 years. The company is investing heavily in the development of the VR content ecosystem. The launch of the VR headsets, Rift and Oculus Quest, their first all-in-one wireless headsets with full freedom of movement, is a step forward towards that goal. The company also announced a multi-year partnership with Raiban parent EssilorLukottica. The two companies, in collaboration, released a pair of smart glasses from the Rai-Ban brand in 2021. Meta also unveiled Project Aria, which will help it develop the first generation of wearable AR devices.
The drastic decline in the stock price has made the stock even more lucrative to hold for solid long-term gains. META shares are down 65.6% year-to-date and are currently trading 67.1% off their 52-week high of $352.71. Moreover, the stock is currently trading at a forward 12-month P/E multiple of 14.87, which is well below its one-year high of 24.96.
Amazon: Downsizing at the world’s largest e-commerce company has already begun, with the company’s CEO Andy Jesse saying in mid-November that layoffs will continue into the next year. The Seattle-based Zacks Rank #3 company reportedly intends to lay off approximately 10,000 employees companywide.
Amazon’s move could be seen as a workforce reduction as the company hired quickly and expanded aggressively during the pandemic when people were needed to shop online alone amid quarantines and social distancing measures. With economies around the world reopening, the e-commerce company’s revenue growth has slowed. Therefore, the downsizing strategy will help it maintain profitability.
In addition, the company’s strategy to diversify its business into multiple areas, including the smart device and cloud infrastructure markets, will drive growth in the long term. Amazon’s Alexa-powered Echo devices are a great weapon to help the company sell products and services. AI-driven Alexa has already been integrated into many everyday digital home devices, turning the emerging smart home market into a potential growth area in a very short time. Furthermore, the company is benefiting from an increasing number of smart devices compatible with Alexa.
Furthermore, Amazon is a leading provider of cloud infrastructure as a service to business customers. Amazon Web Services’ growing customer base, driven by a strengthening cloud offering, will continue to aid Amazon’s global cloud dominance. Even more encouraging is the fact that AVS generates much higher margins than the traditional retail business, which should remain positive for the company’s profitability as it continues to grow in combination.
The stock’s 46.6% year-to-date decline also makes Amazon a lucrative stock for long-term potential gains. Moreover, the stock is trading 48.8% lower than its 52-week high of $174.17. Additionally, it trades at a forward 12-month P/E multiple of 58.64, well below its one-year high of 84.13.
Salesforce: The cloud-based software solution provider revealed in early November that it had cut hundreds of jobs, but says the number is fewer than a thousand. However, a report by online media company Protocol suggests that Salesforce’s job-cutting initiative would affect as many as 2,500 workers.
This move by the company could be due to the slowdown in sales growth. In its most recently released quarterly results, the company reported revenue growth of around 14%, well below the percentage growth in the 20s or more over the past few quarters.
We believe macroeconomic headwinds are impacting Salesforce’s financial results. Businesses are delaying their big IT spending plans as the global economy weakens amid ongoing macroeconomic and geopolitical issues, as evidenced by Gartner’s latest IT spending report. The research firm’s report highlights that IT spending growth in 2022 will be much slower than in 2021 due to reduced spending in devices, software, IT services and communications services.
However, we believe that organizations will accelerate their digital transformation and invest aggressively in adopting cloud-based solutions when macroeconomic headwinds calm.
In addition, Salesforce’s layoff plan can also be seen as a cost-cutting measure amid growing pressure from activist investors to improve profitability. In October 2022, activist investor Starboard Value revealed the purchase of a significant stake in Salesforce and pushed for increased profits through cost-cutting.
Considering the company’s long-term growth potential along with efforts to improve profitability by cutting costs, it is advisable for investors to remain invested in this Zacks Rank 3 stock for long-term gains. Additionally, the stock has lost 48.4% of its market value since the start of the year and is currently trading 51.5% off its 52-week high of $270.56. Moreover, it trades at a 12-month P/E multiple of 23.67, which is significantly less than its one-year high of 120.70.
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