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Friday, March 3, 2023
Today's newsletter is by Myles Udland, Head of News at Yahoo Finance. Follow him on Twitter @MylesUdland and on LinkedIn. Read this and more market news on the go with the Yahoo Finance App.
The tech industry is in transition.
And the word of the moment has a consultant-inspired, decidedly uncool feel that may not quite match the ethos of an industry aiming to change the world, but perhaps does meet this economic moment. And that word is efficiency.
On Wednesday, highly-anticipated announcements from both Tesla (TSLA) and Salesforce (CRM) were framed around the benefits a newfound enthusiasm for efficiency will have for both companies.
For investors, these messages landed differently.
Tesla shares fell 5.8% on Thursday after the company's Investor Day presentation rolled out Tesla's "Master Plan Part 3," which featured limited updates on new products but a heavy dose of how manufacturing efficiencies are at the heart of Tesla's competitive advantage.
"The resounding theme from the Investor Day was that TSLA can drive growth by increasing efficiency across the organization," wrote Bank of America analyst John Murphy in a note to clients on Thursday.
"This will help lower costs and drive profits to fund increased capacity and subsequently offer products at more affordable price points. Among other areas, TSLA is driving efficiency through improvements in vehicle design, developing new powertrains (it has reduced the drive unit cost to $1,000 per vehicle, which is below competing designs), enhancing the electrical architecture, using software to drive better performance of the vehicle, and perfecting its approach to managing the supply chain and overall manufacturing process."
That's a lot of efficiencies!
On the flip side, investors cheered Salesforce's newfound enthusiasm for managing costs and returning cash to shareholders — shares of the cloud company rose 11% on Thursday, aiding the Dow's leading role in the day's market rally.
The company, which is in the midst of fending off no fewer than five activist investors, reported a quarter that beat expectations. And as COO Brian Millham told investors, "We're inspecting every part of our business to find opportunities to drive efficiencies and reduce cost of sales, marketing, and G&A."
On its earnings call, Salesforce management used the word "efficient" or some variation no fewer than 8 times.
"You all know that we've never had an efficiency focus in the company before because we've had 24 incredible years of where we've had to just grow, grow, grow," Salesforce co-founder and CEO Marc Benioff said on the call. "There have been moments where we've had to pull back. '01, '02, bad recession, we had to pull back. '08, '09, we had to pull back and reassess."
"We're kind of looking at this moment as: 'Hey, we can reassess.' This is a incredible moment."
That investors saw the same general argument in two very different ways comes as little surprise: no two companies are at the same point in their growth cycle.
Investors in Salesforce today are looking for discipline. Investors in Tesla are looking for growth to extend its industry lead in electric vehicles.
But the broadest notion of the tech industry both companies feature prominently within does seem to be asking one central question of management teams right now — how much leaner can this thing run?
On this count, Facebook and Instagram parent Meta Platforms (META) serves as the central example of how these demands for cost discipline and more output are corrections from the abundance of the last economic cycle and Covid-era boom. Similar moves have also been made at Alphabet (GOOGL), Amazon (AMZN), and Microsoft (MSFT), among dozens of tech companies big and small.
And the idea that companies can be trimmed, and that workers can be pressed, and that a push to grow at all costs may not meet the moment has moved beyond Silicon Valley and related venues.
That Tesla's big reveal on Wednesday stayed consistent with these themes should have, in hindsight, come as little surprise to investors.
After all, no executive has been more aggressive in pushing to cut costs than Tesla's CEO.
It's just that Elon Musk has been carrying out this plan at another company, Twitter. And continues to search for the lower bound in how many people it takes to run a social media platform. Efficiently, no doubt.
What to Watch Today
Economy
S&P Global U.S. Services PMI, February Final (50.5 during prior month)
S&P Global U.S. Services Composite PMI, February Final (50.2 during prior month)
ISM Services Index, February (54.5 expected, 55.2 during prior month)
Earnings
Hibbett (HIBB)
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