over 1 year ago • 3 mins
The latest round of tech earnings scared the bejesus out of investors. They also raised the specter that for the S&P 500, more frightening stuff is yet to come.
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It was a week to forget for Big Tech. Alphabet’s 6% sales growth – its slowest since 2013, excluding the Covid crisis dip – showed Google’s parent is no longer as immune to an advertising slowdown as it once was. Even so, the fact that YouTube slipped into decline came as a shock, and the video service is rapidly becoming a bit of a problem child. At the same time, Microsoft delivered results that were actually pretty strong: the software goliath managed to grow sales by 11% over last year’s levels. But picky shareholders were unhappy with the cloud business’s slightly worse-than-expected 35% growth and management’s forecast for another step-down in growth this quarter.
Next up was Meta and its pre-Halloween horror show. The Facebook parent’s revenue decline was expected to a degree, but it was the CEO’s R-rated spending that got investors screaming in terror. Meta plans to spend an unfathomable $100 billion or so – almost a full year’s sales – in 2023 as it doubles down on the Metaverse. And all at a time when its core platforms business is coming under attack from rival TikTok. Be patient, Meta’s CEO asks. No, say the shareholders.
There was no letup from Amazon either: growth from its AWS cloud business slowed more than expected to 27%. Management blamed customer belt-tightening, but shareholders are worried that Amazon’s losing market share. After all, Microsoft and Alphabet’s cloud operations both grew at a faster pace. At least Apple’s results provided some relief. Its sales and profit were better than expected, and bosses pointed to a reassuringly sound outlook. And while its services business did fall slightly below expectations, strong Mac and decent iPhone sales meant Apple’s results looked pretty rosy next to its tech compatriots.
1. Throwing money at the problems.
The Big Tech firms that rely mostly on advertising dollars for their revenues were always going to face a slowdown with an economic recession looming. The prudent thing is to scale back spending and cushion the blow, but that’s exactly what Meta and Alphabet aren’t doing. Both those firms do have form when it comes to frivolous spending, but neither is enjoying the growth rates they once were. Investors are asking them to cut their cloth accordingly but, for now, the bosses don’t seem to be listening.
2. Weighed down by tech.
Hopes that the US equity market could avoid a nasty profit recession have taken a bit of a blow, and analysts will likely take a knife to their next year’s profit estimates for Amazon, Alphabet, and Meta. And because these firms make up a decent proportion of the overall S&P 500, what happens to their profits – and Big Tech in general – has an outsized impact on the overall index. But it’s not all bad news: Apple and Microsoft offered promising forward-looking profit views. And then there are the major firms outside of technology, in sectors like energy, that are still raking it in.
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Meanwhile, in the old economy world, consumer-facing firms with strong brands like McDonald’s and Coca-Cola have been merrily passing higher costs onto their customers and turning in strong sales and profit as a result. And get this: stock prices of oil giants ExxonMobil and Chevron have just hit all-time highs. So it would appear that all’s well outside of Silicon Valley.
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