The record of big-tech earnings last week coincided with a massive rise in volatility that ended in a stock market selloff as buyers were nowhere to be found.
While market surrender has been a work in progress since the Thanksgiving holidays, big tech is pretty well handled compared to most technology and growth companies.
And that happened despite so many macroeconomic headwinds that include inflation, interest rates, taping, supply chain barriers, labor shortages and an ongoing war in Ukraine.
However, as a small subset of names weighing heavily on averages established indices, their decline eventually became almost inevitable.
The results for big tech have been mixed, but given the broad headwind, I think the market is already preparing for results that will signal a slowing of the broader economy. Microsoft MSFT,
Apple AAPL,
IBM IBM,
at Qualcomm QCOM,
everyone had blowout results, while Alphabet GOOG,
Intel INTC,
at Facebook parent Meta FB,
okay but not excited. Amazon AMZN,
there was a surprise loss, and the Netflix NFLX,
soured the entire streaming market.
On the whole, the reports have given little to indicate that we are close to recession. The best results showed that some technologies can be insulated from pullback. However, operational efficiency no doubt also plays a part in the numbers. In other words, enterprise tech and top-tier and premium technology seem to be both deflationary and stable. Conversely, consumer-discretionary, low-end technology, and ad-tech seem to be more vulnerable to challenging economic conditions.
Premium tech
Before most of the big tech reported earnings last week, IBM delivered its first double-digit quarter of growth in more than a decade. Aside from a thinner balance following the Kyndryl spin-off, the strong result is clearly anchored by its focus on the enterprise hybrid cloud.
ServiceNow’s NOW,
the remaining quarter is similar because its technology is at the core of large businesses in many industries that streamline processes using automated workflows. Microsoft, Amazon and Alphabet cloud units have shown strong growth. These companies must continue to operate well in more difficult economic conditions.
Results from Apple and Qualcomm reiterated the ongoing demand for high-end devices for consumer and enterprise consumption.
Qualcomm delivered record revenue and growth, with demand for premium-tier handsets leading the company’s big results. The company has also provided strong guidance based on current demand, which it holds from providing chips to almost all of the world’s leading mobile device makers, including Apple.
Apple’s numbers stand out in almost every category. The only downside is its declaration of a possible ongoing supply chain impact in the next quarter – something the company has indicated in each of its previous quarters.
Cracks begin to appear
While Amazon’s surprise loss has garnered a lot of attention, the loss from its stake in electric-vehicle maker Rivian RIVN,
almost half the result. The other half came from the company’s need to reconfigure for post-pandemic e-commerce behavior, which has been a challenging read on the start and stop of Covid-19.
Amazon has benefited from years of e-commerce pull-forward and due to slowing growth. The last quarter provided a break, with the company posting its slowest growth since it began. However, the real problems are tied to rising labor costs and shortages, supply chain problems, fulfillment centers running on capacity and significant investments made to deliver both day and next day on scale.
In the next quarter, Amazon will be able to right-size its workforce and likely adjust pricing and supply to improve results. However, its results showed the weakness of pricing, labor and supply in consumer spending.
Meta is better than many expected but still has weak growth. The alphabet performed well but missed its numbers.
Other social media and advertising names, such as Twitter TWTR,
at Snap SNAP,
there were also mixed results. The Russia/Ukraine conflict has featured slowing advertising growth and user growth on social platforms. The ongoing conflict is likely to weigh heavily in the next quarter as well.
A bigger question for those companies is how the recession or broader economic slowdown will affect ad spending. During the 2008 recession, the market saw ad spending drop by more than 20%. Although advertising is very different today, this type of spending slowdown can significantly affect tech companies ’dependence on ad spending for large swaths of revenue.
Netflix has long struggled but provides a look at the impact of a more difficult economy on consumer decision -making. The pandemic, like Amazon, caused a massive increase in streaming usage but also brought greater competition to the market from Apple, Amazon, Paramount FOR,
Hulu and more. Netflix has continued to raise prices and is now seeing the collapse of more competition and household restrictions on discretionary spending. Streaming won’t give up, but consumer choice and preference will likely lead to shuffling between streaming services rather than multiple subscriptions for those looking to save.
Bifurcation in market
Recent headlines have focused on key averages, watching that 20% drop to represent a bear market. But if you look at tech more closely, you’ll see that names across the Nasdaq have fallen even more dramatically. A quick look at the Nasdaq from recent highs:
– More than 45% of Nasdaq stocks have dropped 50% or more.
– More than 22% of Nasdaq stocks have dropped 75% or more.
– More than 5% of Nasdaq stocks have dropped 90% or more.
This data could be simplified as just a pop-up of the Fed-induced bubble, which led to indiscriminate selling and a rapidly debilitating sentiment towards technology. But if these revenue results indicate anything, it’s that growth is still material for many large technology companies because of the deflationary value of tech in business and the massive appetite for premium technology. consumers remain stable.
As the market enters a less acceptable Fed and a potential recession after last quarter’s surprise GDP drop, the distinction between better and worse technology options is likely to be in the market served by these companies. Business spending for artificial intelligence (AI), data, cloud, software and automation will be stable.
Consumers in the higher market segment are likely to continue to upgrade their iPhones and premium-tier devices, but some of those streaming accounts may need to leave, and ad spending Small business can also slow down.
But tech, on the whole, has performed well in the last quarter, and some names should continue to perform well no matter how bad the market and economy are – and those are the companies we should watch out for.
Daniel Newman is the principal analyst at Futurum Research, providing or providing research, analysis, advice or consulting to Nvidia, Intel, Qualcomm and dozens of other companies. Neither he nor his company holds any equity positions in the companies mentioned. Follow him on Twitter@danielnewmanUV.
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