Wall Street ignored Big Tech's bloat during boom times. Now it's ready to slice and dice.

• The tech sector has laid off 120,000 workers in 2022, including huge layoffs at Meta and Amazon.
• As tech companies' stock has slumped, Wall Street now has leverage over companies.

It's been a brutal autumn for tech, with Meta, Twitter, and Amazon all going through large-scale layoffs.

Over 120,000 tech workers have been laid off in 2022, per the layoffs tracker layoffs.fyi. With budgeting season still underway, that number will likely go up further before the year's end.

One reason for those layoffs: Wall Street is increasingly getting a say in how the tech giants are run.

For much of the 2010s, large tech companies could operate largely without complaint from shareholders on Wall Street over ballooning salaries or increasingly fantastical moonshots, thanks to revenue that reliably grew by double-digits year after year. There were some investors like Benchmark's Bill Gurley who railed against bloated tech spending, but voices like Gurley were the exception, not the rule.

But 2022's slumping tech stocks and dismal revenue forecasts mean Wall Street suddenly has leverage. Go against Wall Street, as Mark Zuckerberg repeatedly did this year by doubling down on metaverse spending, and your stock price gets hammered as institutional investors back away.

Take Fidelity, the third-largest owner of Meta. In 2022, as Meta's stock declined by 66% on year and Fidelity's position lost $27 billion in market value, it flooded the market with 13 million shares, or about 10% of its position, adding to the pain for Meta and its other investors (and no doubt spurring others to sell).

This has emboldened activist investors to say what many on Wall Street are thinking: it's time for big tech, which hired rapidly during the pandemic, to slim down.

'A poorly kept secret in Silicon Valley'

In late October, the hedge fund Altimeter Capital put out an open letter to Mark Zuckerberg and Meta. Fund manager Brad Gerstner called on Meta to slash spending on employees by 20% and limit spending on Metaverse projects and capital expenditures.

While his recommendations were focused on Meta, Gerstner weighed in on the tech sector as a whole.

"Like many other companies in a zero-rate world — Meta has drifted into the land of excess — too many people, too many ideas, too little urgency," Gerstner wrote.

"It is a poorly kept secret in Silicon Valley that companies ranging from Google to Meta to Twitter to Uber could achieve similar levels of revenue with far fewer people," he continued.

Two weeks later, Meta announced it would lay off 11,000 workers, reducing its headcount by 13%.

On Tuesday, hedge fund TCI Capital's Chris Hohn sent a letter to Alphabet's CEO Sundar Pichai, warning him that the company has too many workers, is paying them too much, and wasting money on bad bets. Notably, Hohn approvingly quoted Gerstner's line about Silicon Valley's poorly kept secret.

On Wednesday, Bernstein analyst Mark Shmulik wrote to clients that Google would need to implement layoffs, as the natural attrition rates would slow down as the tech jobs market gets softer. "If you have a job at Google, you're keeping your head down and hoping that cutting toro from the sushi bar is the only cut that affects you," Shmulik wrote.

On Thursday, news broke that Alphabet would be ratcheting up its performance review system, with managers now being asked to mark 6% of Alphabet employees, — about 10,000 people — as low performers. In previous years, managers were expected to label just 2% of their reports as low-performers.

And in the background, activist investor firm Starboard, famous for its punchy presentations on why companies like The Olive Garden need to cut costs and improve products, has been quietly buying stakes in companies like Salesforce, as well as smaller tech operators.

For activist investors, the dual-stock structure of the newer tech giants, where founders have "super shares" that allow them to easily maintain control of the company, will always be a stumbling block to the more traditional role of buying enough of a stake to get a board seat. But they can serve as a voice for what larger investors think but are unwilling to say, and still spur management to action.

The more open question is whether tech companies are truly bloated regarding headcount. Twitter is a test of whether a company can lose 50% of its staff and still function, but because it's privately held by Elon Musk it will be harder to figure out the impact on Twitter's bottom line.

But until revenue growth returns to the tech sector, companies like Meta, Amazon, and Alphabet can't assume investors will come along for the ride. Wall Street will want to see companies cut costs, which will mean more layoffs. If the tech sector enters into a recession — multiple quarters of declining revenue — it's possible that the pain has just started.

This means we may soon have a large-scale experiment, spurred on by investors, about whether or not big tech can produce the same revenue with far fewer people.