Technology titan Microsoft (NASDAQ:MSFT) incurred choppy trading in Thursday’s morning session, with MSFT stock gaining modestly in the final minutes. Earlier, management announced that it will reduce approximately 9% of the headcount of its gaming unit. Fundamentally, the Microsoft layoffs — while not unexpected — clash with broader economic developments, raising some eyebrows.
According to a CNBC report, Microsoft Gaming CEO Phil Spencer stated that the layoffs represent part of an “execution plan” that would reduce “areas of overlap.” This disclosure comes a little more than three months after the company closed its acquisition of Activision Blizzard. The acquired enterprise is a leading developer, publisher and distributor of “interactive entertainment” perhaps best known for its Call of Duty franchise.
Further, former Blizzard President Mike Ybarra stated earlier on social media that he would be leaving Microsoft and Blizzard. Spencer added that Microsoft will provide “full support” for all impacted workers, including location-dependent severance.
Initially, the Microsoft layoffs didn’t really move MSFT stock. As CNBC noted, market participants often expect layoffs after large mergers close. Importantly, the company’s acquisition of the gaming giant represents its largest-ever acquisition — more than double the size of its 2016 buyout of LinkedIn.
Microsoft Layoffs Clash with Positive Economic Data
Nevertheless, as CNBC points out, the bottom line for many tech investors is profitability. If net income isn’t readily available, then they expect higher efficiencies and a clearer road to growth or profitability. Such a framework became even more pronounced due to recent economic challenges. Essentially, companies must fight for fading consumer dollars, and the Microsoft layoffs reflect this harsh reality.
Other tech juggernauts have also announced job cuts earlier this week. For example, eBay (NASDAQ:EBAY) stated that it would lay off 1,000 workers, while SAP (NYSE:SAP) announced it would shift or buy out 8,000 employees. In both cases, the underlying securities saw a significant rise in their share prices. That contrasted with the Microsoft layoffs and its impact on MSFT stock.
Still, another more glaring variance exists: the negative implications of the Microsoft layoffs versus the recent economic picture.
Per another CNBC report, the economy ran at a much more rapid pace than expected in the fourth quarter. At the same time, inflation eased, thus giving substantial hope that the Federal Reserve can engineer a so-called “soft landing.” After all, many forecasters previously regarded a recession as an inevitability.
Still, not all signs suggest a rosy canvas for the economy. As it generally relates to the Microsoft layoffs, concerns center on how long consumers can keep opening their wallets amid declining savings and the accrual of high-interest debt loads. Therefore, questions exist about the willingness to spend for discretionary items such as video games.
Why It Matters
Despite the tough circumstances surrounding the Microsoft layoffs, the overall assessment of MSFT stock is resoundingly positive: a unanimous strong buy, and that’s among 35 top Wall Street analysts. Also, the average price target stands at $436.45, implying almost 8% upside potential.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
