Software giant Microsoft on Wednesday announced plans to lay off 10,000 employees, or about 4.5% of its workforce. The move comes amid a slowdown in its core businesses and big investments in opportunities like artificial intelligence and cloud computing. Microsoft stock fell on the news.
Microsoft will take a $1.2 billion charge in its just-ended fiscal second quarter related to severance costs and other restructuring expenses. The Redmond, Wash.-based company plans to release its December-quarter results on Jan. 24.
In a memo to employees, Microsoft Chief Executive Satya Nadella said customers worldwide are cutting their spending in a difficult economic climate. Meanwhile, declining sales of personal computers have hurt Microsoft's Windows and Office software franchises, he added.
"It's important to note that while we are eliminating roles in some areas, we will continue to hire in key strategic areas," Nadella said. "We are allocating both our capital and talent to areas of secular growth and long-term competitiveness for the company, while divesting in other areas."
In particular, he called out advances in artificial intelligence fueling the next wave of computing.
Microsoft Stock Dips
On the stock market today, Microsoft slid 1.9% to close at 235.81. Year to date, Microsoft stock is down 1.7%. Last year, it dropped 28.7%.
"We are seeing the clock strike midnight for the tech sector after a decade of hyper growth," Wedbush Securities Daniel Ives said in a note to clients. "And now major layoffs are being seen at Microsoft, Salesforce, Meta, Amazon, among many others across the Valley."
Ives reiterated his outperform rating on Microsoft stock with a 12-month price target of 290.
Microsoft looks to "stay in the left lane of innovation while trimming nonstrategic areas (hardware, etc.)," Ives said. It is investing in cloud computing, AI and mergers and acquisitions, he said. One pending deal is its $69 billion purchase of video game publisher Activision Blizzard.
Microsoft also reportedly is in talks to increase its investment in artificial intelligence startup OpenAI by $10 billion. It invested $1 billion in OpenAI in 2019. OpenAI's technologies include chatbot ChatGPT and image generator Dall-E 2.
RBC Capital Markets analyst Rishi Jaluria predicted that Microsoft will reduce its Surface computer business, which has been a money-loser.
Microsoft's 'iPhone Moment'
Oppenheimer analyst Timothy Horan praised Microsoft's investments in OpenAI. The teaming of Microsoft and OpenAI will create "artificial intelligence's iPhone moment," he said in a note.
"At minimum, ChatGPT will be for Cloud what iPhone was for the wireless industry and societal change," Horan said.
Further, Horan rates Microsoft stock as outperform with a price target of 265.
MoffettNathanson analyst Sterling Auty said Microsoft's layoffs are a short-term story while AI is the company's long-term strategy.
"We believe investors are focused on these layoffs when instead they should be focused on the news flow around Microsoft's relationship with OpenAI," Auty said in a note Wednesday. "Any potential layoffs are a tactical reaction to the cyclical conditions in this part of the business cycle, but the possible investment in OpenAI and bringing AI across the Microsoft portfolio could help drive growth for decades to come."
Auty rates Microsoft stock as market perform, or neutral.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
