Nearly every big tech company has announced mass layoffs, it seems. Among the tech titans who have dismissed thousands of employees include Alphabet, Meta Platforms, Amazon, and Salesforce.
Tech companies are facing a reckoning, as valuations have come down following a boom for tech products and services during the pandemic, and rising interest rates have caused a shift in market sentiment to value profits over growth, as unprofitable growth stocks have been hit especially hard.
That helps explain why big tech stocks like the ones mentioned have laid off workers even when they're highly profitable.
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While the drumbeat of layoffs in the tech sector continues, there is one tech company that stands head-and-shoulders above its peers despite layoffs, and that's Microsoft (MSFT 0.01%).
Like other big tech companies, Microsoft recently announced a round of layoffs back in January as it prepared for slower growth. In a memo to employees, CEO Satya Nadella said that the company would align its cost structure with revenue and demand, which will result in a workforce reduction of 10,000 jobs this quarter.
Microsoft's December quarter results offer some explanation for the layoffs. Overall revenue rose just 2% to $52.7 billion, and adjusted earnings per share fell by 6% to $2.32. While those results may not inspire confidence among investors, the stock has actually risen since the report came out, and it deserves a premium compared to its big tech rivals.
Why Microsoft has an edge
Microsoft is more diversified than its big tech peers, and while overall revenue growth is slow and expected to remain that way, not all of the business is struggling.
Its personal computing segment was an eyesore, impacted by the broader decline in PC sales, as revenue in the category fell 19% to $14.2 billion. Windows OEM and devices revenue was particularly weak, with both categories falling 39%. Part of the company's cost-cutting plans is focused on changing its hardware portfolio.
However, its intelligent cloud business continues to put up solid growth, with revenue up 18%, or 24% to constant currency, to $21.5 billion, and Azure growing 31% or 38% in constant currency.
Microsoft doesn't break out profits for Azure, but the cloud-hosting business is believed to be a major profit driver for the company, as the intelligent cloud is now its biggest segment. The company expects constant-currency revenue growth from Azure to slow to 30% in the current quarter, though that's still an impressive clip considering the recessionary climate, and Azure should continue to drive profit growth at the company for the foreseeable future.
There's another reason why Microsoft looks posed to outperform its big tech peers: It's playing offense in AI, making a $10 billion investment in ChatGPT-creator Open AI, and it recently announced a new version of Bing that's powered by ChatGPT technology.
Whether the new Bing succeeds in disrupting Google remains to be seen, but Microsoft doesn't have to win to have an impact with the new Bing. As CFO Amy Hood pointed out, each percentage of market share in search represents nearly $2 billion in revenue, so just a few percentage points here would move the needle for Microsoft and put pressure on Alphabet.
Meanwhile, Microsoft is integrating ChatGPT technology into other products like Azure and its Edge browser, which should also help give it a competitive advantage going forward.
What's next for Microsoft?
The company will take a $1.2 billion charge for severance and other costs, including cutting down its real estate portfolio, but the layoffs should help boost the company's profitability and more closely align it with future growth opportunities in AI.
Azure should continue to be a significant growth driver for the company, as some estimate the cloud infrastructure addressable market to be worth more than $1 trillion, and if it can execute on its AI goals, Microsoft should have a lot of upside potential.
Even as Microsoft trims its workforce, its future looks as bright as ever.
