Weekly Brief: Can Big Tech Save Earnings Season?

Weekly Brief: Can Big Tech Save Earnings Season?

over 1 year ago3 mins

Mentioned in story

Tech companies’ shares have gone from hero to zero this year, but that hasn’t stopped investors hoping they save the day this earnings season.

🕰 Recap

  • Netflix’s stock went tumbling after it lost streaming subscribers for the first time in over a decade back in April
  • And even ecommerce darling Amazon couldn’t save Big Tech: its first-quarter results fell short of expectations too
  • So coming into second-quarter earnings season, analysts doubted that tech companies could grow their profits compared to the same time last year
  • But that was before Netflix reported better-than-expected second-quarter results last week

✍️ Connecting The Dots

Investors once headed into Big Tech earnings with one question on their minds: not whether the results would be better than expected, but how much better they’d be. With good reason too: it seemed the likes of Netflix, Alphabet, and Microsoft could do no wrong during the pandemic. But now the trips, slips, and blips of Meta (formerly Facebook) and Amazon are fresh in investors’ memories, and their bullish questions have quietened to a whisper.

It’s now more common for investors to wonder which tech companies will blink first. After all, you can bet that tech firms of all sizes are feeling the pinch if stalwarts like Microsoft and Salesforce are already trimming their costs. Tech companies that sell directly to consumers will be bracing for impact: high inflation and rising energy prices have been diminishing consumers’ spending power across the US and Europe, forcing them to sacrifice some nice-to-haves (sorry, Netflix). But businesses that mainly sell to other businesses could be in trouble too: the recent trend of “consumption-based pricing” – essentially a pay-as-you-go model that tech giants use to win over new customers – could backfire as corporate customers use and spend less as their own demand shrinks. There are clues that’s happening already, so heavyweights like Amazon, Alphabet, and Microsoft could be at risk.

US tech companies with big international businesses – that’s basically all the big names – will also need to contend with the dollar’s current strength versus other currencies like the Japanese yen and the euro. See, the cash they earn abroad will be worth less when it’s translated back into US dollars than it would’ve been at the same time last year – and that’ll knock the profits of everyone from Amazon to Apple.

🥡 Takeaways

1. It’s all fun and games until the profit warnings roll in.

Tech stocks have dropped 20% so far this year, and that might not even be the end of it. Companies are likely to start reducing their earnings forecasts to adjust to rising recession risks, which for some could just be a way to make whatever growth they do deliver look more impressive. But for others, it might be the start of a cascade of downgrades: mix higher financing and production costs with dwindling sales, and plenty of companies will have to fire workers and ditch expansion plans to keep their profits from plummeting. And that’ll probably knock their share prices down further too.

2. This could be the calm before the storm.

Still, tech earnings aren’t actually expected to be disastrous despite the doom and gloom – especially for companies that lock their customers into long-term contracts for multiple products. After all, they won’t be as immediately affected by wild swings in spending. But there could be a bloodbath come the end of the year, as their customers plan budgets and scale down on bigger projects. Even the high-growth cloud computing sector could see a slowdown if companies cut down on unrestrained spending.

🎯 Also On Our Radar

A new generation of exchange-traded funds (ETFs) that launched earlier this month will let retail investors bet on or against individual stocks using leverage. Investors should be aware of two things: ETF “slippage” when your investment doesn’t precisely track the value of the underlying stock, and the key risk of “shorting” stocks – which is that your potential losses are theoretically infinite.

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