Earnings season and AI layoffs

Key takeaways:

• Layoffs don’t always mean cost-cutting: Tech giants are cutting jobs while increasing expenditures, so efficiency gains aren’t guaranteed.
• AI investments keep soaring: Companies are ramping up AI infrastructure spending, with Meta alone set to spend $65bn this year.
• Earnings season will reveal the winners: With Meta, Alphabet, and Microsoft already reported, all eyes turn to NVIDIA to gauge AI’s impact on revenue and margins.

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We’re barely two months into 2025, and 46 tech companies have already announced job cuts. Bloomberg recently found many tech firms see a short-term share price boost following layoffs. And with earnings season upon us, it's worth scrutinising if layoffs actually improve efficiency, or if they reflect deeper challenges. Here’s what to look out for from the companies leaning into AI who are reporting this month. 

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Meta

• Latest earnings date: already reported, 1 February, 2025

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Prior to the firm’s earnings announcements earlier this month, Mark Zuckerberg announced plans to cut 5% of Meta’s workforce and "raise the bar" on performance evaluations. Meta’s share price climbed after the announcement.

While layoffs are always significant for those affected, in Meta’s case, they represent a small fraction of its total workforce. Job cuts alone do not streamline operations, making a share price bump potentially short-lived. 

Meta is also hiring new employees to replace those laid off, while increasing costs by increasing its spending on AI to $65bn this year. Evidently, its expenditures are set to grow, not decline. And its AI revenues are not keeping pace. Meta’s ‘Reality Labs’, which includes its AI research laboratory, is operating at a loss over four times its revenue.

If other AI-heavy firms follow a similar pattern of reductions on one hand, rapid investment on the other,  investors may want to rethink assumptions that cutting costs will always lead to long-term profitability improvements.

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Salesforce

• Upcoming earnings date: 26 February, 2025

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Salesforce is reportedly cutting over 1,000 jobs while simultaneously embarking on a sales representative hiring spree for its new AI products. This move aligns with Salesforce's broader strategy to better integrate AI into its offerings, particularly through Agentforce, a platform for AI-powered virtual representatives.‍

While Agentforce has shown promise, allegedly closing 200 deals in a single week during its last quarter, Salesforce isn’t alone in this space. Competitors Microsoft, Meta and SAP are also creating versions of their own. The firm’s decision to downsize some departments while doubling down on an unproven AI division is a high-stakes bet. Without a clear competitive moat, the long-term payoff remains uncertain.

Salesforce’s layoffs reflect a workforce shift rather than outright cost-cutting — again raising the question: does AI-driven restructuring truly lead to greater efficiency?

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NVIDIA

• Upcoming earnings date: 26 February, 2025

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NVIDIA, a leader in AI hardware and software, is laying off employees who helped cut AI model processing power requirements by up to 80%. Once pioneers at the helm of a major AI efficiency breakthrough, even these employees have not been immune to layoffs.

Meanwhile, the firm is doing what it can to boost demand for its chips by bolstering the AI ecosystem which it serves. In 2024, the company invested $1bn in 50 AI startups, with the goal of supporting those companies requiring its products and services.

NVIDIA’s share price has faced challenges since Chinese AI competitor, DeepSeek, launched its generative AI product reportedly made at a fraction of the cost of its rivals.With so much of the broader market moving in lock step with NVIDIA’s ups and downs, its earnings at the end of this month could lead to some immediate short term volatility across major indices. 

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Dell

• Upcoming earnings date: 27 February, 2025

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Dell announced job cuts earlier this year after reporting a substantial 37% fall in demand for its PCs last quarter. The firm was hit by growing costs too. Dell reported declining profitability for its AI servers, a revenue stream the firm has been very focused on expanding. 

Dell frames AI as both an opportunity and a challenge, justifying job cuts while struggling with AI-related costs. Investors should consider whether Dell’s AI strategy is truly sustainable or if its cost-cutting efforts signal deeper financial struggles. 

While AI investments are often dubbed a long-term growth driver, Dell’s thinning margins raise concerns about the economics of AI hardware, and if it is indeed as lucrative as the hype suggests. The company’s upcoming earnings call will be key in determining if AI-related costs are setting up a sustainable future or merely a costly experiment.

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Looking beyond the hype

The latest bout of tech layoffs underscores the complex relationship between workforce reductions and AI investments. Although companies often frame layoffs as efficiency improvements, the reality is nuanced. In many cases, alleged cost savings have been funnelled into AI development, suggesting that the market’s positive response is more about AI optimism rather than actual performance improvements.

Stock price increases following layoffs do not necessarily indicate growth. Many of these short-term bumps fade as the market remembers that layoffs alone do not drive long-term profitability. Understanding the true financial impact of these decisions can help avoid falling into the trap of buying into short-lived stock market hype.

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