Microsoft layoffs are not enough to shake our cautious view of the tech giant

Published Wed, Jan 18 20234:24 PM EST

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

Microsoft 's (MSFT) layoff announcement Wednesday doesn't shake our guarded view of the stock. In fact, it reinforces our belief that the technology giant's business still has more challenges ahead. The company is making the job cuts — roughly 10,000 workers, not quite 5% of its workforce — because revenue growth is slowing, and it needs to bring down expenses to better align with its near-term revenue projections. Other tech giants like Amazon (AMZN) and Facebook parent Meta Platforms (META) have recently laid employees off, too. The Club wants to see tech giants tighten their belts, and Microsoft took a step in that direction — although more may need to be done, Jim Cramer suggested Wednesday. However, we see no reason to run in and buy Microsoft shares on the layoff news because it doesn't allay concerns about slowing sales growth and margin pressure. It confirms them, which is why this isn't an all-clear signal to start buying the stock here. Microsoft CEO Satya Nadella warned earlier this month that the next two years could be challenging for the tech industry as demand for its products normalizes following a bump during the pandemic. Those Nadella comments put a fine point on the fact tech isn't booming like it once was, and helped motivate the Club's decision last week to lock in profits on 125 Microsoft shares purchased roughly five years prior. Microsoft's headcount reduction is an even more concrete acknowledgement that the winds have changed. MSFT 1Y mountain Microsoft's stock performance over the past 12 months. Near-term caution on Microsoft doesn't invalidate the company's long-term potential, though. In some ways, Microsoft currently exemplifies a tension investors often face between present fears and future promise. Microsoft has received a flurry of positive headlines in recent weeks stemming from its close partnership with ChatGPT, an artificial intelligence-powered chatbot that went viral after its public release late last year. While the Club wrote about ChatGPT's impact on Microsoft in December , the chatbot has continued to capture Wall Street's attention. On Wednesday alone, two different analysts published notes discussing Microsoft and its work with OpenAI, the startup behind ChatGPT. Microsoft invested $1 billion OpenAI in 2019 and reportedly has eyed a larger investment in recent weeks . "We believe investors are focused on these layoffs when instead they should be focused on the news flow around Microsoft's relationship with OpenAI," MoffettNathanson analysts wrote in a note to clients Wednesday. The firm has a market perform (or hold) rating on Microsoft. "The way we see it, 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." Meanwhile, Oppenheimer analysts said Microsoft and OpenAI had created artificial intelligence's "iPhone moment." "At minimum, ChatGPT will be for Cloud what iPhone was for the wireless industry and societal change," wrote the analysts, who have an outperform (or buy) rating on Microsoft. "We expect MSFT to embed this technology in all of its services, and for it to be a major driver of incremental revenue and ultimately position the company in a more dominant position within every cloud segment with shocking but organic new services." The Club isn't questioning the transformative potential of artificial intelligence in general and for Microsoft's business, in particular. But right now it's not enough to change our outlook on the market and how our portfolio should be positioned. We're not abandoning tech all together. We'd just rather be putting new money to work in non-tech parts of the market, a view reflected in our decision Tuesday to start a position in industrial heavyweight Caterpillar (CAT). Over the coming years, the company stands to benefit from an injection of federal infrastructure spending, and it has a capital return program — dividend plus stock buybacks — that the Club covets in this market. Bottom line Layoffs at Microsoft are yet another sign of the tech industry's challenges and demonstrate why the Club has been cautious on the company's stock as of late. The Club ultimately believes more cuts at Microsoft could be in order. Despite this perspective, we recognize a downturn in Microsoft's business tied to overall economic factors isn't the same as a company gone completely astray with dimming long-term prospects. Investors in Microsoft are grappling with the push and pull between the rocky present and hopeful future, and how much weight to put on both. For the Club, a more prudent approach continues to prevail. (Jim Cramer's Charitable Trust is long MSFT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Leonardo Munoz | Corbis News | Getty Images

Microsoft's (MSFT) layoff announcement Wednesday doesn't shake our guarded view of the stock. In fact, it reinforces our belief that the technology giant's business still has more challenges ahead.