Big Tech trims its sails as it braces for a bruising quarter

Despite widespread investor concerns about how Big Tech earnings would fare in the first three months of 2022, most of the results were surprisingly solid.

But the companies’ warnings of the challenges they now face underscore how rocky 2022 could get for even some of corporate America’s most valuable companies. Those obstacles include: inflation, a war in Ukraine, a semiconductor shortage, declining advertising revenue, softer consumer spending, and the lingering effects of the Covid-19 pandemic.

the market reaction was intense. Shares in Facebook parent Meta rocketed up almost 18 per cent after the company pledged to rein in spending on its virtual world ambitions, while Amazon shares dropped 14 per cent — their biggest one-day fall since 2006 — as retail spending declined. Even appetite for Apple shares was damped after its executives detailed how supply challenges could weigh on its next earnings report.

The volatile share prices reflect just how on edge the market is over risk of China supply chain shock and Russia’s invasion of Ukraine, said Jim Tierney, chief investment officer for US growth at AllianceBernstein.

But on balance, he added, “corporate America is managing through what has been thrown at them so far, and managing quite well.” Revenues at Apple, Alphabet, Microsoft, Amazon and Meta collectively rose nearly $38bn from a year ago — an average gain of 13 per cent.

Still, the tech-heavy Nasdaq index has been under pressure, recording in April its worst monthly drop since the 2008 financial crisis as investors reassess lofty valuations amid a tightening monetary cycle and the looming risk of a recession.

Column chart of Nasdaq Composite index, monthly % change showing Worst month for Wall Street's tech stocks since 2008

Tech executives did not shy away from telling investors why the rest of the year remains a wild card. Amazon’s executives cited labor shortages in China, high fuel prices and spiraling costs for long-haul air and ocean shipping. Meta’s Sheryl Sandberg said global regulatory risks are “a real challenge for our industry” as “the rules that are governing the internet are being rethought and rewritten”.

Both of those companies in particular emphasized keeping a lid on spending, signaling more focus on their core profit centers rather than expansionist ambitions.

At Apple, the biggest problem in the past quarter seemed an enviable one: keeping up with demand. But investors were caught off guard by the depth of supply chain woes expected to hamper the current quarter.

Three months ago, the iPhone maker’s finance chief Luca Maestri said supply chain issues were being resolved and forecast record revenue for the March quarter. He was right about the record — total revenues increased 9 per cent to $97bn — but renewed lockdowns in China and other constraints could cause headwinds of between $4bn and $8bn this quarter, Maestri told investors.

“No one is immune from supply chain disruption,” said Paolo Pescatore, analyst at PP Foresight. “This challenge will escalate for the next year due to Covid and the war in Ukraine. I expect all companies to be significantly constrained for some time.”

One cause for bullishness did emerge — growth in enterprise spending is robust. Revenues at the cloud divisions of Amazon, Microsoft and Alphabet collectively grew 42 per cent from a year ago, according to research group Canalys. Combined, their global market share is 62 per cent.

“Organisations of all sizes and vertical markets are turning to cloud to ensure flexibility and resilience in the face of . . . global supply chain issues, cyber security threats and geopolitical instability,” Canalys said.

Satya Nadella, chief executive of Microsoft, offered the most confident assessment among the Big Tech giants. The company’s cloud business grew 46 per cent, and he offered an outlook so positive one analyst said it would be “heard around the world”. I have estimated tech spending is, as a percentage of GDP, “going to double” by the end of the decade.

“I don’t hear of businesses looking to their IT budgets or digital transformation projects as the place for cuts,” Nadella analyst told. “If anything, some of these projects are the way they’re going to accelerate their transformation or, for that matter, automation, for example. I have not seen this level of demand for automation technology to improve productivity.”

Consumer spending, by contrast, looks wobbly. In contrast to cloud provider Amazon Web Services — where revenues jumped 37 per cent and operating profit hit $6.5bn — the Seattle tech giant’s online store sales slipped 3.4 per cent and it recorded an operating loss of $2.8bn.

Amazon’s executives sounded more like the beleaguered management at one-time pandemic darling Platoon as they acknowledged how an aggressive push to expand during Covid had left the company with excess capacity and bloated fixed costs from bringing on too many staff.

Finance chief Brian Olsavsky estimated “incremental costs” of $6bn in the quarter. “Approximately two-thirds of these costs are within our control,” he said, “and with demand normalizing we remain focused on right-sizing our cost structure and driving out any cost inefficiencies.”

Momentum in online advertising is also stumbling as many countries emerge from the pandemic and consumers reassess their buying habits amid the highest, most persistent inflationary trend in decades.

Advertising at Alphabet’s Google rose 22 per cent to $54.7bn, slower than the 32 per cent pace recorded a year earlier, while ad sales at its YouTube division climbed just 14 per cent to $6.9bn, missing analysts’ expectations by about $600mn.

At Meta, where ads account for 97 per cent of revenues, advertising grew just 6 per cent from a year ago — its slowest pace in a decade, according to eMarketer. Amazon’s advertising business, “a key piece to the bull thesis” according to Bank of America analysts, missed forecasts with 25 per cent growth, far below a 76 per cent expansion a year ago.

Alphabet’s finance head Ruth Porat repeatedly said a deceleration in ad spend should be expected for the rest of the year, given how unusual 2020 was. “Obviously, we will not have that tailwind for the rest of the year,” she said.

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