Microsoft (MSFT) announced today it will be laying off 18,000 employees over the next year, and taking a $1.6 billion restructuring charge to streamline the business.
The numbers are pretty staggering, with that figure representing 14% of Microsoft employees and over 3.5 times as large as the 5,000 employees laid off in 2009 to mark the first-ever mass downsizing for MSFT stock.
That Microsoft layoffs had been rumored for some time makes the news a little less shocking, but still even MSFT stock investors that are enjoying a decent pop this morning on the news seem to be amazed by the sheer scale of this restructuring.
While the layoffs are obviously going to be hardest on the workers, as investors we still have to take a rational and objective look at the corporation to see what it means for MSFT — particularly if you are personally a Microsoft stock holder, wondering what to do next.
Here’s what the layoffs mean, by my assessment:
Microsoft Stock Will See Short-Term Pop on Sentiment
Microsoft stock rose about 3% on the news today, despite the big initial price tag associated with the move.
That’s because cuts have seemed overdue to Wall Street for a while, given the relatively stagnant nature of Microsoft stock over the last decade and the need to trim some fat to improve profitability. The recently-acquired hardware arm of Nokia (NOK) also added redundancies, and this Microsoft layoff announcement sows the company is nipping that issue in the bud.
But in 2013, when the company announced a massive reorganization and followed that up quickly with news that CEO Steve Ballmer would be stepping down, shares started to perk up.
Recent news like this only fuels the general feeling that Microsoft is serious about plotting a new course, and in the short term MSFT stock holders can expect the positive vibes to continue around Microsoft. If any weak numbers hit, they can always be blamed on the way the “old” Microsoft was run, after all.
Restructuring Gives MSFT More Fuel for Growth Engines
More important than mere sentiment is the tangible move that affirms new Microsoft CEO Sataya Nadella is more of a “wartime” leader than a passive figurehead, willing to make hard choices and look objectively at the company instead of with rose-colored glasses that assume success for MSFT stock is a given.
In his memo to Microsoft employees, Nadella talked about “greater accountability” and a need to “become more agile and move faster.” This involves cutting out management, eliminating redundancies and a laser-like focus on embracing a “strategic direction as a productivity and platform company.”
Nadalla’s counterpart, Nokia exec Stephen Elop, echoed those sentiments in a note of his own. “Collectively, the clarity, focus and alignment across the company, and the opportunity to deliver the results of that work into the hands of people, will allow us to increase our success in the future,” Elop wrote.
We will have to wait until Microsoft earnings on Tuesday, July 22, to get more details about strategy and new initiatives. But clearly MSFT is committed to clearing the deck — and is showing this in actions, not just words.
However… What’s Next?
All this will certainly give Microsoft stock a lift in the short term and probably the medium term. Events like these provide a good shield, because poor performance can be blamed on the “old” Microsoft and Nadella has certainly bought himself time with the mass layoffs that will take a year or so to roll out and absorb.
But as investors, we must look around the corner in MSFT stock to what comes next. And while it’s hard to argue that these moves are necessary, the recent company reorg does not automatically guarantee success.
Plenty of companies lay off employees because they have too — from tech giant BlackBerry (BBRY), which slashed 40% of its workforce in September 2013 and is actually in the red since then thanks to a continued loss in market share and brand appeal for its struggling smartphone line.
Or take embattled retailer J.C. Penney (JCP), which announced layoffs and store closures in January. The stock popped over a week or so after the news… and is right now slightly below where it was at the end of January.
In other words, Microsoft is doing the right thing by buying time and freeing up resources.
What it does with that time and resources, however, remains an open question. And investors need to watch MSFT stock carefully to get a sense of when the optimism from this restructuring fades… and the serious questions about what comes next for the stagnant tech giant take center stage once more.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.