Lyft layoffs are 'very consistent in what we've seen in big tech' cost-cutting strategies: Analyst
D.A. Davidson Managing Director and Senior Research Analyst Tom Forte and CFRA Research Senior Equity Analyst Angelo Zino join Yahoo Finance Live to discuss recent layoffs in the tech sector and the future outlook for the industry.
Video Transcript
- First layoffs in tech continue to mount. Lyft shares. Let's check them out right now. On a report, they are up 6 and 1/2 percent. Following this report, the ridesharing company will significantly cut jobs in an effort to reduce costs. Now, according to the "Wall Street Journal," these latest layoffs could affect nearly 30% of the company. Roughly 4,000 workers. And potentially reduce costs by 50%. Joining us now, DA Davidson Managing Director, Tom Forte. And CFRA Research Senior Equity Analyst, Angelo Zino. Angelo, you cover Lyft. Your reaction to the layoff news.
ANGELO ZINO: Not completely surprised about it given what we've been seeing across the markets here over the last couple of months. I mean, given the fact that we've already kind of done a fairly significant cost cut several months ago. Now that being said, I think this kind of tells you what kind of precarious situation that really is in. I mean, given the share loss that they've had from here over the last couple of years. So overall, I think it was probably something they needed to do. They do need to right size the business model. And they do need to focus on getting that free cash flow sustainably profitable. But that being said, I think, again, it shows you what kind of position these guys are in. And we wouldn't be touching to this company at all here looking ahead. But it was a much, much needed move in our view.
- But Angelo, all that being true, can you be surprised given that one of the first things David Risher, the new CEO, said that you want to work on there is improving morale?
ANGELO ZINO: Yeah. I mean, that's interesting. Right? So this definitely doesn't do that in terms of improving morale. But I will tell you this. I mean, it's almost kind of ripping the Band-Aid in many respects. It's something, again, that needs to get done. Do need to right size the business model before focusing on anything else. And then we'll see what they decide to do on a going forward basis. Our fear is they're going to be stuck in maybe this perennial cycle where you continue to see cost cuts as the business model continues to have to struggle against Uber. And we all know when you kind of think about the Uber and Lyfts of the world, what really kind of works is the scalability of this business model. The way you succeed in this model in this business is by getting that scale up there. And if you can't do that, you're stuck in a position like this. So again, this might not be the last time you see this announced a cost cut of this magnitude.
- Tom, what do you think about the cuts today? Because over the last year, we're looking at Lyft shares off just about 70%. We know that Lyft has been steadily losing some market share here to Uber. Is this the right move at this point?
TOM FORTE: Sure. So my colleague Tom Wait covers both Lyft and Uber. And if he were here, he would tell you that where Uber has done a good job versus Lyft is essentially having their Uber Eats service, which gave them a little more flexibility when you saw a slowdown in ride sharing. Now the move though to cost cuts via layoffs is very consistent what we've seen in big tech. If you look at companies reporting next week in particular Amazon, Roku, and Pinterest all engaged in a second round of layoffs in the March quarter. So in that regard, I think what Lyft is doing is very consistent with what you're seeing in big tech right now, which is a lot of cost management via layoffs.
- All right. So let's get the bigger picture now. Earnings season really gets underway in tech starting next week. We'll hear from Microsoft, Alphabet, Meta, Amazon, and Snap next week. And the following week we'll hear from Apple. Tom, let's stay with you. And overall, your expectations going into that pivotal earnings season.
TOM FORTE: Yeah. So expectations are very low. So again, going back to the notion that if you judge companies by their actions-- Amazon, Pinterest, and Roku all had layoffs in the March quarter. In the case of Amazon, late in the quarter. And if they're laying off people, especially late in the quarter, that suggests that the macroeconomic challenges are getting more difficult. And I think when you couple in the mini financial crisis in banking, and Roku and Pinterest layoffs, that suggests that digital advertising may have taken a step backwards in the March quarter. So low expectations for me for big tech heading into earnings.
- Angelo, when it comes to the performance of a lot of these tech giants, obviously, they have really been leading the markets rally over the last several months since the start of the year. If we do get as weak of an earnings season as many in the street are bracing for, what does that mean for the rally that we've seen in tech?
ANGELO ZINO: Yeah. I mean, it's kind of just like in many respects. I mean, you kind of look at your point maybe year to date, you've seen broader attack up north of 18%. Pretty much all driven by multiple expansion largely. I mean, tech peekies at a 2024 basis spending about 22 times on an equal basis. Trading about 16 and 1/2 times. But when you kind of look at the move here, it really has been on multiple expansion.
I think as far as Q1 earnings season is concerned here, you really need to see these companies focus at the very least beating on the bottom line side of things. And then at least kind of guide towards more of a bottom in terms of the margin side of things with a potential kind of improving forward commentary on the top line side of things as well as on the margin side of things. Clearly, the dollar is going to help in this case. You've got some Russia-Ukraine kind of headwinds over the last year where those comps are getting also a little bit more favorable as you go into the June quarter. Certain companies are also going to lap maybe some supply constraints that they witnessed in the June quarter a year ago.
So I think there are some positives in terms of easier comps out there. And in terms of the forex. But at the very least, I mean you need to see execution maybe to times point in terms of the cost cuts that we've seen announced helping on the bottom line side of things. And then some at least positive indications in terms of commentary.
- Tom, if there's one company that ought to give us a decent sense of the macro it's Amazon. What are your expectations next week? What's the one thing you'll be focused in on? And if I could just tag on. Do you expect more layoffs?
TOM FORTE: Yes. So I do expect more layoffs because again you saw the news of the day is that they're cutting people at Whole Foods. Whole Foods is perhaps the last round of cuts. Suggesting that maybe on a relative basis they're trying more to focus on grocery. So they were last to cut Whole Foods. But I think my expectations again for Amazon are low. I do think, though, that the weakening of the US dollar versus major currencies should help Amazon. Could perhaps add as much as a billion to our revenue forecast for the quarter. Yes, it's encouraging that cost cuts may lead to some better margin. But I'm concerned that this is definitely not the Amazon of 10, 20 years ago. And you can't cut yourself into a strong footing. So low expectations for Amazon.
- Angelo, two names that you coveR-- Meta and Alphabet Google-- they are both really participating in this hype that we have seen surrounding AI. How big of a driver do you expect that to be for those two stocks? At least in the near term.
ANGELO ZINO: Yeah. I mean, clearly, when we saw Q4 earnings season take place, a lot of it was really driven on AI. The excitement there. And that kind of hope that the rally here over the last couple of months. And our view here, you're going to hear a lot on the AI side of the things from both companies. Clearly, there's been, I think, more negativity in terms of the Alphabet side of things, which really is held back the multiple in that stocks. We do think a lot of those concerns are a bit of an overreaction.
Hopefully, they put some of those issues to rest here in terms of the quarter. But more importantly, I think you're going to see AI talked about more so for Alphabet in terms of the Google I/O Conference in May. So that's probably more [AUDIO OUT] in terms of the May events rather than what we are going to see here next week as far as AI is concerned.
- Should be an intriguing weekend. Angelo Zino. Tom Forte. Good to see you both. Enjoy the weekend. Thank you.
