It may seem odd that announcing job cuts is enough to drive up a share price. After all, the fact roles are being cut would imply that life isn’t going well for the business. However, this does happen, just as we saw with Amazon (AMZN:NASDAQ) earlier in January when its shares briefly rose on news of 18,000 job cuts.

Aside from the costs associated with redundancies, reducing employees means trimming a company’s cost base. This factor is
why investors get excited at such news.

Michael Burry rose to fame when he was portrayed by Christian Bale in the 2015 film The Big Short. The hedge fund manager was among the first investors to spot serious problems in the US subprime mortgage market which went into meltdown in 2007.

Burry posted a message on Twitter expressing his shock at the market reaction last week to Salesforce (CRM:NYSE) announcing plans to cut 10% of its workforce, news that drove a near-4% rise in its share price. Referring to Salesforce’s stock code CRM, he said: ‘CRM should have been down 25% on those job cuts.’

Slowing demand has led Salesforce to look at its staffing needs. Like many tech companies, it hired a lot of people after the pandemic drove increased demand for digital services. Boardrooms across the tech sector were abuzz with senior management predicting this heightened demand would be permanent. Sadly, it has not proved to be true, leaving Salesforce and many other tech companies with no other choice but to trim their cost base.

Burry received a lot of criticism on Twitter following his comment, with many people saying he was wrong and that job cuts had been widely requested by investors and that adjusting staff numbers was overdue. However, one person suggested that hiring and not firing during a difficult period might create better morale and ultimately a more productive workforce. Food for thought.

A lot of senior management seem to be very short term in their thinking. Life is tough now, but will it be the same in six months’ time? They might find it hard to rehire good people if demand suddenly picks up again.

Time will tell for Salesforce, but it is wrong to assume that a share will always go up on job cuts. Investors should look at the bigger picture and work out why workforce cuts are happening, what it says about a business’ fortunes and whether there is a risk that the remaining staff could be overworked because they’re having to take on additional duties. You also need to assess if the drop in demand that caused the job cuts is structural or cyclical.

Ultimately the fundamentals of a company should be more important to your investment decision-making that chasing a short-term market reaction to a quick cost saving measure.

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