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Last week’s slate of big-tech earnings coincided with a massive spike in volatility that ended with a stock market selloff as buyers were nowhere to be found.
While the market’s capitulation has been a work in progress since around the Thanksgiving holiday, big tech had held up relatively well compared to most tech and growth companies.
And that happened despite a plethora of macroeconomic headwinds that include inflation, interest rates, tapering, supply chain constraints, labor shortages and a sustained war in Ukraine.
However, as a small subset of names that weigh heavily on the averages have propped up the indices, their eventual decline had become almost inevitable.
The results for big tech were mixed, but given the vast headwinds, I think the market was already bracing for results that would indicate a slowing of the broader economy. Microsoft
MSFT,
Apple
AAPL,
IBM
IBM,
and Qualcomm
QCOM,
all had blowout results, while Alphabet
GOOG,
Intel
INTC,
and Facebook parent Meta
FB,
fared OK but didn’t excite. Amazon
AMZN,
had a surprise loss, and Netflix
NFLX,
turned the entire market sour on streaming.
As a whole, the reports gave little to indicate that we are nearing a recession. The best results showed that some technologies might be insulated from the pullback. However, operational excellence undoubtedly played a part in the numbers as well. In short, enterprise tech and top-tier and premium technology appear to be both deflationary and stable. In contrast, consumer-discretionary, low-end technology, and ad-tech all look more vulnerable to challenging economic conditions.
Premium tech
Before most of big tech reported earnings last week, IBM delivered its first double-digit growth quarter in more than a decade. Besides a leaner balance sheet following the Kyndryl spin-off, the strong result was clearly anchored by its focus on enterprise hybrid cloud.
ServiceNow’s
NOW,
outstanding quarter is similar as its technology is core to big enterprises across a plethora of industries streamlining processes with automated workflows. The cloud units of Microsoft, Amazon and Alphabet showed strong growth. These companies should continue to do well in tougher economic conditions.
The results from Apple and Qualcomm reiterate sustained 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 result. The company also provided bullish guidance based on current demand, which it has a handle on from providing chips to nearly all of the world’s top-tier mobile device makers, including Apple.
Apple’s numbers were outstanding in almost every category. The only woe was its declaration of a possible continued impact of the supply chain on the next quarter — something the company has indicated in each of its past few quarters.
Cracks begin to show
While Amazon’s surprise loss drew much attention, the loss from its stake in electric-vehicle maker Rivian
RIVN,
accounted for nearly half of 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 with the Covid-19 starts and stops.
Amazon benefitted from years of e-commerce pull-forward and was due for a slowdown in growth. Last quarter provided a breather, with the company posting its slowest growth since its inception. However, the real problems are tied up in rising labor costs and shortages, supply chain problems, fulfillment centers operating at capacity and significant investments that have been made to deliver same day and next day at scale.
Over the next quarter, Amazon will be able to right-size its workforce and will likely adjust pricing and supply to improve results. Still, its results showed the fragility of pricing, labor and supply on consumer spending.
Meta did better than many had expected but still had tame growth. Alphabet performed well but missed its numbers.
Other social media and advertising names, such as Twitter
TWTR,
and Snap
SNAP,
also had mixed results. The Russia/Ukraine conflict has highlighted the slowing growth of advertising and user growth on social platforms. The sustained conflict will likely weigh into the next quarter as well.
A bigger question for those companies is how a recession or broader economic slowdown will impact ad spend. In the 2008 recession, the market saw ad spending drop by more than 20%. Although advertising is very different today, that type of slowdown in spending could significantly impact tech companies’ dependence on ad spending for large swaths of revenue.
Netflix has been in trouble for some time but provides a look into the impact of a tougher economy on consumer discretionary. The pandemic, much like Amazon, fueled a massive uptick in the adoption of streaming but also brought greater competition in the market from Apple, Amazon, Paramount
PARA,
Hulu and more. Netflix continued to raise prices and is now seeing the fallout of more competition and household tightening of discretionary spending. Streaming isn’t going to capitulate, but consumer choice and preference will likely lead to shuffling between streaming services rather than multiple subscriptions for those looking to save.
Bifurcation in the market
Recent headlines have focused on the major averages, watching for that 20% drop to represent a bear market. But if you are watching tech more closely, you will have seen that names across the Nasdaq have fallen more dramatically. A quick look at the Nasdaq from the recent highs:
— More than 45% of Nasdaq stocks are down 50% or more.
— More than 22% of Nasdaq stocks are down 75% or more.
— More than 5% of Nasdaq stocks are down 90% or more.
This data can be oversimplified as a mere popping of the Fed-induced bubble, which has led to indiscriminate selling and a rapidly souring sentiment toward technology. But if these earnings results indicate anything, it is that growth is still material for many large technology companies as the deflationary value of tech in the enterprise and the enormous appetite for premium technologies by consumers also remain robust.
As the market settles into a less accommodative Fed and a potential recession after last quarter’s surprise GDP decline, the demarcation between better and worse tech picks will likely be in the markets these companies serve. Enterprise spending will be robust for artificial intelligence (AI), data, cloud, software and automation.
Consumers at the higher end of the market will likely keep upgrading their iPhones and premium-tier devices, but some of those streaming accounts may have to go, and small-business ad spending may also slow.
But tech, as a whole, performed well last quarter, and some names should continue to perform exceptionally well no matter how much worse the market and economy get — and those are the companies we should be watching.
Daniel Newman is the principal analyst at Futurum Research, which provides or has provided research, analysis, advising or consulting to Nvidia, Intel, Qualcomm and dozens of other companies. Neither he nor his firm holds any equity positions in companies cited. Follow him on Twitter @danielnewmanUV.
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