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Wednesday, Sept. 28, 2022
Tech's ugly summer will get worse before it gets better
The third quarter will, mercifully, come to an end Friday, closing out a trainwreck for big names in the tech industry as fears of a recession, changing consumer appetites, a broader bear market, and supply chain snarls conspired against the once-hot sector.
Shares of Big Tech companies have collapsed. Year-to-date Meta (META) is down 59%, while Nvidia is down 58%. Amazon (AMZN) is off 31%, same as Google (GOOG, GOOGL), and Microsoft (MSFT) is down 29%. The only firms outpacing the broader S&P 500 — which is off 22% — are Tesla (TSLA), which is down 21%, and Apple, down 15%.
“It’s the most negative as I’ve seen tech going back to 2009,” Wedbush Securities managing director Dan Ives told Yahoo Finance on Monday, noting that investors are shying away from riskier investments like tech.
But long-term tech investors shouldn’t lose hope, especially if consumer demand for products like Apple’s iPhones and cloud computing orders for companies like Microsoft hold pace. And while we could see ugly earnings reports in October, tech companies could start to bounce back by the new year.
Tough going for everyone but Apple and Tesla
How did we get here? While life has returned to normal for most people, the shocks the pandemic sent through the economy continue to reverberate with some of the highest inflation we’ve seen in decades.
The Federal Reserve is responding by driving interest rates ever higher. In turn, a strengthening dollar is also hurting companies’ sales abroad, with many firms reporting foreign exchange rates as a major pain point in their last earnings reports. These macroeconomic factors took a particular toll on tech companies specializing in discretionary items as consumers pulled back from making purchases.
To say it was a difficult quarter for tech companies is an understatement. And while they’re all getting hit by inflation and rising interest rates, it’s showing through in different ways.
Chip companies, for instance, saw demand for semiconductors fall amid declines in PC sales. Ahead of its second quarter earnings, Nvidia (NVDA) announced it would miss its prior projections as gaming sales dried up. According to the company's numbers, gaming segment revenue dropped an eye-watering 33% year-over-year in the quarter and 44% compared to the first quarter. Worse still, Nvidia missed street expectations for its third-quarter forecast, saying it will bring in $5.9 billion rather than the $6.9 billion analysts had expected.
Intel took a similar hit as PC sales fell, and Microsoft reported that its Windows OEM revenue, the money it brings in from sales of Windows to PC makers, fell 2% year over year. Intel (INTC), meanwhile, took a hit thanks to a decline in PC and server chips. The company is projecting 2022 year-end revenue will be $11 billion lower than it initially expected.
Meanwhile, ad-supported tech companies like Meta and Snap (SNAP) have been hurt by Apple’s (AAPL) privacy changes that prevent apps from tracking their users’ activity across the web. That and slowing ad sales amid the current economic climate, resulted in Meta’s first ever year-over-year revenue decline, dropping by 1%. Snap hasn’t done much better, announcing layoffs and cuts to products like its drone camera.
Amazon, for its part, is trying to correct itself after over-expanding its e-commerce division to deal with the crush of orders during the height of the pandemic. And while it beat on revenue expectations in the second quarter, and surpassed third-quarter projections, there’s no telling how a slowing economy could impact overall sales.
Some companies, however, have continued to perform surprisingly well. Not only did Apple beat analysts’ expectations on revenue and earnings in the second quarter, but it also set a quarterly revenue record as well. Tesla, meanwhile, met revised expectations for the quarter, and announced that June was its highest vehicle production month yet.
It’s not all doom and gloom
There are other bright spots in tech, chiefly in the cloud space. While Microsoft’s Windows OEM division was slapped in the quarter, its cloud business did incredibly well. The company missed analysts’ expectations on overall revenue, but its Intelligent Cloud revenue was up 40% year over year. Nvidia, meanwhile, saw its Data Center business revenue jump 61% in the quarter.
“Fundamentally, enterprise tech has held up well, as budgets and spending are not tapering off given the massive spending allocated to cloud and digital transformation projects,” said Ives. “That said, the softer economy is now front and center and we would expect [foreign exchange] and macro headwinds to be a key theme during tech earnings season in October. The stocks are reflecting a lot of bad news and the Street will breathe a sigh of relief if demand holds through the rest of the year in the beaten-down tech sector.”
Demand for Apple’s new iPhone 14 line is also holding steady compared to the iPhone 13, and with the Pro devices getting the biggest push, that could bode well for sales in the coming quarters.
Companies are also committed to investments despite the economic downturn. During Intel’s Innovation conference on Tuesday, CEO Pat Gelsinger said the company is continuing to move forward with its plans to build out chip foundries and is dedicated to its move into the graphics chip market.
The coming holiday season will be an incredibly important time for the industry as analysts and investors look for hints as to how everyone from consumers to advertisers are spending their cash. And with luck, that could point to improvements heading into next year.
“Once things settle down I think you'll see tech companies be some of the biggest and fastest gainers,” TECHnalysis Research president and chief analyst Bob O’Donnell said. “The hard part is predicting when that will be, but I'm hopeful for the first quarter of 2023.”