Microsoft (NASDAQ:MSFT) is implementing a big round of layoffs. This is, apparently, supposed to be a sign of Microsoft showing fiscal discipline. At the same time, the company is in talks to spend $10 billion on an an artificial intelligence chatbot. These developments should be a cause for concern among MSFT stock traders.
Microsoft is facing the same headwinds that many famous tech giants did in 2022. Hypergrowth in the wake of Covid-19’s onset in 2020 and 2021 felt good while it was happening, no doubt. However, last year it was time to “pay the piper,” as they say.
Now it’s 2023 and Microsoft’s problems haven’t just gone away. Retrenchment was inevitable, but don’t be hasty to applaud Microsoft for demonstrating discipline. The company’s workforce reduction will come at a cost. Plus, Microsoft could soon end up spending billions on an AI platform, and that’s not in line with the whole “fiscal discipline” theme.
What’s Happening with MSFT Stock?
MSFT stock hit hard resistance at $315 last year, and simply never recovered. Now the shares are trading below $250, and Microsoft’s 1.17% dividend yield isn’t much consolation for investors who lost money in 2022.
The company’s turnaround plan, it seems, involves letting part of its workforce go. Just recently, CEO Satya Nadella revealed that Microsoft plans to cut 10,000 jobs. That’s not a small reduction, as it represents 5% of Microsoft’s workforce.
Some folks, including Nadella, might view this as a positive development. Ask yourself, though: Is a big workforce reduction really a positive sign for Microsoft? Nadella admitted that now, Microsoft will “have to do more with less.” Conceivably, this could involve sacrifices in the quality or efficiency of Microsoft’s customer service, research and development, leadership and so on.
Is Microsoft Really Committed to Cutting Costs?
By the way, there’s a financial price to pay for Microsoft’s job cuts. Reportedly, they will result in result in a $1.2 billion charge in Microsoft’s second fiscal quarter, which translates to a 12-cent reduction in earnings per share.
Furthermore, investors might wonder whether the workforce reduction really cements Microsoft’s commitment to cost cutting. After all, the company is evidently in talks to potentially invest $10 billion in OpenAI. As you may have heard in the news lately, OpenAI developed ChatGPT, an AI chatbot.
Microsoft’s investment in OpenAI hasn’t been confirmed. Still, it sounds like Microsoft is prepared to consider spending lots of money on machines, while sending real people home. Maybe, Microsoft’s commitment to reducing expenditures isn’t as strong as management would likely have us believe.
What You Can Do Now
It’s hard to build a convincing argument that MSFT stock will perform better this year than it did in 2022. A major headcount reduction isn’t necessarily a sign that Microsoft is a thriving company right now.
This doesn’t mean Microsoft will never be worth investing in. It’s wise, however, to stay on the sidelines for the time being, and wait to see what Microsoft’s management does next in order to address the company’s challenges.
On the date of publication, Louis Navellier had a long position in MSFT. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.