Large technology companies will, I believe, come out of 2023 with higher profit margins than many expect. I think we saw some of the dynamics in the Netflix report this week and the playbook they mentioned and that Meta and others have been pushing lately.
Other examples are Dropbox and Box, who are reaching 30 % profit margins and have started repurchasing shares, executing a PE-style playbook for a few years.
The most dramatic way to improve margins short-term is large layoffs, like the 30% reduction announced by Lyft today. That on top of layoffs last year. Unfortunately I think we will see more of that.
In addition ongoing expense management, lower hiring and lower investment will lower cost and/or make sure it grows slowly. With 80% gross margins it doesn’t take a lot of sales growth for companies to see margin expansion.
Lower investments will likely open up many areas for startups to compete in, as large tech companies will cancel non-core projects and will stop most of the habit of keeping great people on payroll and let them ‘rest and vest’.