The True “Goldilocks” Number for Tech

She sat in the big chair. “This chair is too big,” she said.

She sat in the medium chair. “This chair is still too big,” she said.

She sat in the small chair. “This chair is just right,” she said.

Then the chair broke.

“Oh well…”

– Goldilocks and the Three Bears

A 19^th century fable, astrobiology, monetary policy, and 1980s buzzwords have one thing in common…

And over the next couple minutes I’ll connect these seemingly disparate dots.

Even better, understanding how these intertwine could help you outperform the S&P 500 by more than three-fold.

So, what’s the secret?

Well, like most secrets there’s more to it than at first blush.

The Goldilocks Principle

A delicate dance has been playing out in the technology sector for months.

Companies want to show investors that they’re healthy and hip, but also serious about doing grown-up things like managing expenses.  

In turn, there’s a pattern that’s emerged.

And if you’re a fan of trends – and hopefully you are if you’re reading these pages – then you know things like this pique our interest.

Let’s see if you spot it…

For Splunk (SPLK), it was 4%.

For Dell Technologies (DELL), Microsoft (MSFT), Okta (OKTA), Pinterest (PINS) and Sofi Technologies (SOFI), it was 5%.

For Alphabet (GOOGL), Rivian (RIVN), and Spotify (SPOT), it was 6%.

For Informatic, GitLab (GTLB), and PayPal (PYPL), it was 7%.

And for NetApp (NTAP), it was 8%.

All these numbers are in a tight range. And the median is 6%.

But what does it mean? And more importantly, what can it tell us?

Well, there’s a concept known as the “Goldilocks Principle.” It’s inspired by that lovable B&E enthusiast and vandal, Goldilocks. And the idea is centered on, “just right.”

It’s most often quoted in terms of astrobiology and the “Goldilocks zone.” This is the cozy, habitable orbit a planet must be nestled in around a star to support life. It’s not too hot, not too cold… it’s just right.

For many years, we enjoyed a “Goldilocks economy” in the U.S. (until its recent, violent end). That’s where market-friendly monetary policy from the Federal Reserve, moderate growth, and low inflation happily co-exist. It’s an economy that’s not too hot, not too cold… it’s just right.

And today, we now have “Goldilocks zone” for the tech companies I listed above, and it’s 6%.

During the height of the pandemic, when everyone was trapped inside pedaling furiously to nowhere on their Pelotons (PTON), baking endless loaves of sourdough, and shopping like the world was ending and they didn’t want to exit this life without missing a sale, technology companies were booming. COVID and the stay-at-home economy was a godsend for the sector.

To keep up with this demand – which they assumed was never, ever going to end and was definitely going to continue for eternity – tech companies hired every person they could.

The insatiable hiring spree spiraled into insanity. For some perspective, Amazon (AMZN) increased the size of its workforce by 75% during the pandemic.

Unfortunately, the growth that was forecast to continue ad infinitum collapsed... as any sane person would’ve expected. And, all of a sudden, technology companies found themselves facing declining sales and bloated payrolls.

Well, since the 1980s, the most popular corporate strategy to correct this imbalance has been rightsizing.  

The problem is, how much of the workforce to cut?

Tech darlings want to shed enough to demonstrate to investors they’re cutting costs in a meaningful way… but not too much to signal there’s a fundamental problem or face public backlash.

From a management standpoint, the “Goldilocks zone” for layoffs is right around 6%. It’s serious. But not too serious. It’s just the right amount of rightsizing.

But are those moves just right for your portfolio?

The Wrong Side of Rightsizing

6% seems adequate.

And in some parts of the world, might even be considered above average.

But when digging through the vast heap of discounted tech stocks available, don’t be afraid to look for something bigger.

I know, no one wants to be seen as the bad guy.

But let’s be honest… if you’re the boss, you’re going to eventually play the villain. And sometimes that’ll mean attacking a problem with a cleaver not a scalpel.

So, while tech boardrooms and PR departments appear to favor that 6% “Goldilocks zone” when it comes to layoffs, you want to see more.

In a high interest rate environment – like we’re in now and will be in for the foreseeable future – tech stocks shoulder a hefty burden. They tend to struggle with bigger debt loads and smaller profits. And right now, the best returns for investors are coming from those companies hacking more meat from the bone.

I’m talking Affirm (AFRM), Coinbase (COIN), Groupon (GRPN), Meta Platforms (META), Salesforce (CRM), Twilio (TWLO), Vimeo (VMEO), Zoom (ZM), and others – who announced workforce reductions in the double-digits.

They’ve been forced to do more. But it’s resulted in better rewards for shareholders.

Let me breakdown this claim…

The companies that announced layoffs of roughly 6% saw an average one-day move of +2.73% on the news. Wall Street loves cost-cutting.

But since then, shares of these companies have returned an average of -0.51%.

On the other hand, when tech companies announced layoffs of 10% or more, their shares saw an average one-day move of +3.29% on the news.

And since those announcements, shares of these companies are up an average of 17.28%.

That’s more than three-times the return of the S&P during the same span.

The biggest winners have been Twilio, Salesforce, Coinbase and Meta Platforms, all of which are up more than 20%.

That means for investors, the true “Goldilocks” number in tech has been over 10%.

A 19^th century fable spawned a universal word for just right – “Goldilocks.”

Whether we’re talking about astrobiology or economics, when we hear “Goldilocks” we instantly understand what it means.

Tech companies appear to have a “Goldilocks zone” of 6% when it comes to layoffs.  But so far in 2023, cuts outside this have led to better payoffs for investors. And those making these deep cuts now might be just right for your portfolio in 2023 and beyond.

Ahead of the bears,

Matthew

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© 2023 Matthew Carr

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