After Block's Layoffs, Could These 3 Companies Be Next?

The news out of Block (NYSE: XYZ) on Thursday night sent shockwaves through the tech industry.

The Jack Dorsey-run fintech company said it would lay off more than 40% of its employees, citing gains from artificial intelligence (AI). Dorsey said, "The core thesis is simple. Intelligence tools have changed what it means to build and run a company. A significantly smaller team, using the tools we're building, can do more and do it better."

Some investors balked at the move, noting that Block had ramped up its headcount during the pandemic and has been bloated since. However, software stocks fell on the news as it seemed to reflect the same fears in the Citrini Research blog post that shook the market on Monday.

Layoffs aren't out of the ordinary for any company, but cutting 40% of your workforce is virtually unheard of.

The iShares Expanded Tech-Software ETF lost 1.3% in response to Block's announcement and was down as much as 3% on Friday. However, Block stock soared, finishing the day up 16.8%, after trading more than 20% higher.

Plenty of tech CEOs noticed Block's surge, and it shows that investors seem to be hungry for layoffs in the sector, especially as stock prices have plunged.

Let's take a look at a few other stocks that could be next up to issue layoffs.

Image source: Getty Images.

1. IBM

IBM (NYSE: IBM) isn't a pure-play software-as-a-service (SaaS) company as it has a large consulting business, but software does make up a significant part of the business, and the company has been touting its shift to a slimmer, more asset-light, tech-forward business for some time.

The company was also early to AI with Watson, though it has relatively little to show for it since then. IBM did report its first quarter of double-digit revenue growth in more than a decade in Q4, showing the business is gaining traction in areas like software.

With the stock down nearly 25% in just a month, investors may be fretting about AI disruption. IBM generates just $240,000 in revenue per employee, well below that of nearly every other tech stock. A round of layoffs from IBM would likely be well-received by the market.

2. DocuSign

Like Block, DocuSign (NASDAQ: DOCU) also went on a growth and spending binge during the pandemic and hasn't really recovered.

The stock is still down more than 80% from its peak during the pandemic, and it's gotten caught up in the recent software sell-off as it's down more than 34% this year.

DocuSign earns $450,000 in revenue per employee, and like Block, it seems like it could benefit from embracing AI tools. Layoffs would likely give the stock a boost.

3. Zillow

Zillow (NASDAQ: Z) (NASDAQ: ZG) is not a traditional software-as-a-service stock either, but the company also shows signs of bloat after expanding during the real estate boom during the pandemic.

Like its peers, the stock has also tumbled lately, and is down 35% year-to-date. Zillow currently brings in $350,000 in revenue per employee, meaning it could expand its margins with a round of layoffs.

Why it matters for investors

Block's move made it clear to software companies that investors are likely to reward them for cutting their workforce, and AI provides cover, if not justification, for doing so.

Software companies also spend nearly all of their revenue on employees, meaning there's significant leverage to be gained from layoffs.

For investors, a wave of layoffs is likely to be a good thing, and layoffs among big tech companies at the end of 2022 and the beginning of 2023 helped spark a recovery in tech stocks.

Block may be the first of the AI era to do mass layoffs, but it won't be the last.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Block, Docusign, International Business Machines, and Zillow Group. The Motley Fool has a disclosure policy.