- 7 Companies that are safe during the ongoing Mass Layoff Trend.
- Last week, the market got flooded with news of layoffs at Google and Microsoft. In addition, Amazon and Meta have announced mass layoffs earlier. All these firms stock prices jumped after the layoff announcement, with Meta's price jumping to 18% and Amazon's price jumping to 14.1%.
- When I look at the term structure, the US 10 yr treasury bond trades at 3.5% against a three-month treasury bond rate of 4.7%, giving a -1.21% yield spread, resulting in an inverted yield curve. As the inverted yield curve is a significant predictor of recession, it was understandable that firms would resort to cost-cutting (layoffs) to weather the slowdown.
- The stock price of Amazon, Meta, Google, and Microsoft declined in the last six months. When I compared the average P/E multiple over five years against the current P/E multiple, Meta has suffered worse, with its P/E multiple reducing to 50% of the average 5yr P/E multiple.
- Despite the stock price correction, I analyzed the imputed growth rate the market has priced in the current share price.
- Current Share price = Value of firm at no growth + Value of future growth.
- EV at no growth = NOPAT /WACC
- P/E multiple at no growth = 1/cost of equity
- First, I determined the share price and P/E multiple of the four firms at no growth.
- Then I found out the last 5 yr EBIT CAGR for the four firms and its 5 yr average ROIC.
- I determined the Value of future growth by DCF using my growth rate and ROIC assumption.
- After that, using Solver in excel, I determined how much growth rate the market has priced in its stock price by keeping the intrinsic EV equal to the current EV.
- For the next ten years, the market expects:
- Microsoft to grow at 20.3% CAGR
- Google to grow at 17% CAGR
- Amazon to grow at 50.2% CAGR
- Meta to grow at 9.6% CAGR
- Further, the P/E premium the market is paying for the four firms is as follows:
- At 26x current P/E, market is paying 16x for growth at Microsoft
- At 19x current P/E, market is paying 9x for growth at Google
- At 88x current P/E, market is paying 79x for growth at Amazon
- At 13x current P/E, market is paying 4x for growth at Meta
- My conclusions from this analysis
- The market has underpriced Meta (as it does not believe in Metaverse), overpriced Amazon (continues to believe in their Field of dreams approach), reasonably priced Google (expects its growth to slow compared to last 5 yrs), and Microsoft.
- The market has given a thumbs down to new initiatives like entry into the Metaverse (Meta), driverless cars (Google), or AI assistant (Alexa) as all of them have flopped, and most of the layoffs have happened in these businesses. It implies how difficult it is for big tech firms to enter new businesses successfully.
- I have attached my work below; please get in touch with me if you need help understanding it. Also, please comment below on your opinion of these firms.
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