What the layoffs at Tesla and Coinbase mean for investors


Key points to remember

  • Tesla announced layoffs to 10% of its workforce, Coinbase also laying off 18% of theirs
  • This is the latest in a series of downsizing, especially in the crypto sector
  • These layoffs are being made assuming a recession is imminent, but it’s still a question of whether we’ll actually see one.
  • After huge falls in 2022, the tech sector looks undervalued, which could create opportunities for investors

Elon Musk appears to be following up on his recent announcement to lay off 10% of Tesla’s workforce, with several employees already gave their marching orders. Tesla is not the only high-profile company to announce such a move, and the prospect of a “crypto winter” sees this sector heavily impacted.

A series of big names in the crypto industry have announced layoffs, including Coinbase reducing their workforce by 18% and BlockFi by 20%. Even Crypto.com, the same company that recently paid around $6.5 million for a Super Bowl ad and signed a $700 million deal to rename the Staples Center, announced its 5% cut plan. of its workforce.

Overall, this appears to be a continuation of bad news for the tech sector. But does this negative sentiment suggest that the worst is yet to come, or is the industry starting to look a bit undervalued?

Why is Tesla laying off workers?

Tech stocks were destroyed, which you probably already know, unless you’ve hiked the Himalayas with no cell reception in the past six months. Almost every company in the industry has seen their market cap drop massively since the start of 2022. Amazon is down over 35%, Meta is down around 50%, and even Apple is down over 25%.

Tesla has seen a phenomenal rise in its share price over the past few years, and it’s now falling just as rapidly. So far this year, the stock is down more than 40%, and Elon Musk’s leaked internal memo indicating he had a “super bad feeling” on the economy did nothing to help.

It is in this same internal note that he announces that Tesla will lay off 10% of its workforce. With employee numbers hovering around 100,000, that could mean 10,000 workers are being shown the door.

So why are they doing this? Downsizing in a business is one of the main ways companies look to manage their costs when times are tight. Not only do they save on salaries, but also on all associated costs such as pensions, healthcare and even physical office costs.

As the S&P 500 officially enters a bear market on Monday, Elon Musk can surmise that by anticipating a possible recession, he can cut Tesla’s costs while avoiding a last-minute slash and burn.

Download Q.ai today to access AI-powered investment strategies. When you deposit $100, we add an additional $50 to your account. Crypto winter causes layoffs at Coinbase

If things seem a bit dicey in the tech realm, these are practically the Roaring Twenties compared to the world of crypto. Aside from a slight respite in early March, Bitcoin has been declining since November of last year and shows no signs of slowing down.

Ethereum is suffering just as much, if not worse, and thousands of other coins and tokens are at risk of disappearing altogether. This massive selling pressure is wreaking havoc on the industry, with many trading platforms and network operators struggling to stay afloat.

First, the collapse of popular crypto projects Terra Luna and Terra USD, which evaporated $42 billion of investor money virtually overnight. DeFi network Celsius has been the most publicized apparent victim in recent days, suspending all withdrawals and transfers from the platform due to liquidity concerns.

This is terrible news for an industry that is equally heavily exploited and built on trust in the networks and blockchains that support coins and tokens. Celsius hasn’t collapsed yet but it’s obviously in trouble.

With such massive problems in the sector, it’s hardly surprising that mass layoffs are on the cards. Companies like Coinbase and BlockFi are struggling to secure their balance sheets, and downsizing will allow them to do so quickly.

Coinbase announced its layoffs via a blog post by its chief executive and co-founder, Brain Armstrong. He shared a view similar to Elon Musk, that the economy seemed likely to be heading into a recession, and added that this could lead to a crypto winter. It is a term used in crypto circles to mean a dramatic and sustained fall in price.

As an exchange that facilitates the buying and selling of cryptocurrency, Armstrong explained that previous crypto winters have seen a significant drop in trading revenue and this has put considerable pressure on the finances of the company.

He also said that Coinbase “grew too quickly” during the frothy 2021 bull market and it had since become clear that they had overhired during that frenetic time.

Simply put, falling crypto prices come with less media coverage and less mainstream interest. This leads to reduced revenue for companies in the space, forcing them to cut costs to try to stay profitable or at least minimize their losses.

Do layoffs mean a company is in trouble?

Not necessarily. Layoffs never make headlines, but that doesn’t always mean alarm bells are ringing. It is common for companies to go through phases where their payroll becomes a bit inflated. This is easily overlooked when the economy is booming and incomes are rising, and a downturn can provide an opportunity to review labor efficiency.

Reducing the number of employees may not always be enough to maintain profit margins throughout a recession, but it can help limit the damage. It can also help the business rebound strongly once revenue is recovered.

However, this is not always the case, and sometimes layoffs signal big problems within a company. As with most things related to investing, there’s no way to tell for sure which direction things will go until they’ve already happened.

A recession is not a certainty

With all that half-talk from top CEOs, you’d be forgiven for thinking a recession is a done deal. In reality, this is far from the case. A recent Bloomberg survey of 37 economists put the probability of a recession at 30%. The trend is slowly rising, but at the moment these are not bad odds.

Bank of America recently released a comment that also supports a more optimistic view. Their chief financial officer, Alastair Borthwick, revealed that consumer spending was up 9% in the year to June and they were seeing “reasonably strong loan growth”. This would suggest that economic activity is not completely at a standstill, despite some recent uninspiring GDP growth figures.

What do the layoffs mean for investors?

Most layoffs in the crypto sector will have no impact on regular investors, as companies like Crypto.com and BlockFi are private. Tesla and Coinbase, however, are publicly traded companies, and stock investors have already seen their values ​​plummet so far this year.

Taken in isolation, the layoffs do not change the fundamental position of the company or the outlook for investors. This will help companies reduce costs, which is generally a good thing. However, this can increase the workload and pressure on existing employees, which can lead to further problems later. Again, the impact of the layoffs on Tesla and Coinbase’s bottom line will remain to be seen.

Arguably, a recession would not be good news for any of them. Elon Musk and Brian Armstrong are calling a recession early, and if they’re right, it will put further pressure on the revenue of their businesses as well as many others. With less money in circulation, fewer people will buy Teslas, trade cryptos, buy sneakers, or go on vacation. This spending cut potentially leads to further layoffs and wage freezes, creating an even tighter spending spiral.

For investors, this can create the need to be more precise in selecting investments. In the words of Mark Cuban, “Everyone is a genius in a bull market.” With everything going up, investors can afford to pile into crypto stocks and projects without worrying too much about fundamentals.

When times are tough, it’s not that easy. There are several ways to approach the question. At Q.ai, we know that there are potential headwinds on the horizon, which is why we have created several investment kits that aim to protect against them, and even profit from them.

If you’re on the same page as Elon Musk and Brian Armstrong, you might consider our Large cap kit. In times of little or no economic growth, large companies tend to outperform smaller ones. With this kit, we use AI to rebalance a long/short trade on a weekly basis, which seeks to take advantage of this performance gap.

If you’re feeling more optimistic about the tech industry in particular, we just released our Technical rally kit. Tech stocks have taken a hammer blow lately, and we think that may have gone a bit far. In our view, the massive falls in tech stocks have started to make them look undervalued, especially relative to more traditional companies that have generally held up well so far in 2022.

Tech Rally uses ETFs to create a long/short position that aims to take advantage of the valuation gap between the tech sector and the Dow Jones, home to old-school companies like Johnson & Johnson, Caterpillar and Boeing.

Both of these kits are offered as limited editions and we will only keep them open as long as the opportunity arises.

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