The biggest week of tech earnings was a disappointment and unfortunately, things are unlikely to be much better in the fourth quarter. Still, if you’re playing the long game, there’s no reason to jump ship. There are opportunities emerging.
All five Big Tech giants reported results this past week. Amazon.com (AMZN) and Apple (AAPL) posted disappointing results within 30 minutes of each other on Thursday. One such report would have been a rarity. In unison, they felt like a modest quake in tech land. Their earnings followed a similarly weak performance from Facebook (FB)—er, Meta—earlier in the week. Alphabet (GOOGL) did a little better, but Microsoft (MSFT) was the clear winner, posting better-than-expected results and impressive guidance.
The tech sector is grappling with a series of lingering and intersecting issues that are going to take considerable time to fix. The good news for Big Tech companies is that there’s no problem with demand—this is all about finding enough parts, producing enough goods, and getting merchandise into the hands of customers.
Here are six takeaways from the big week of earnings:
Microsoft is hot, Apple is not. With Friday’s post-earnings selloff in Apple shares and Microsoft’s earnings-driven rally earlier in the week, the companies are virtually tied in the battle for market-cap supremacy. They’re both worth about $2.4 trillion. Heading into the year, Apple had a $500 billion lead. Microsoft’s momentum is likely to continue. The company addresses every one of the hottest markets in software, including the cloud, security, gaming, and communications. Apple is struggling to get parts, while Microsoft sold more Xbox consoles in the quarter than expected. Microsoft provided detailed and compelling guidance for the December quarter. Apple warned that its supply-chain woes are getting worse. Apple relies on Asian component suppliers. Microsoft is built on the cloud, which doesn’t require shipping containers. The Wall Street consensus calls for low-single-digit growth for Apple in its September 2022 fiscal year, while Microsoft seems poised to keep growing in the midteens.
Mark Zuckerberg is going all in. In reporting earnings this week, the Facebook CEO announced plans to invest $10 billion this year as a first down payment on the metaverse, which is supposed to be the next evolution of the internet. (You need to read or watch Ready Player One to get the idea.) He also said that the company would report financial results in two segments going forward, with the (revenue-generating) social apps in one bucket and the (money-consuming) metaverse in the other. And in case investors missed the point, on Thursday Facebook changed its corporate name to Meta. On Dec. 1, the stock gets a new ticker: MVRS.
It would be easy to dismiss this as a misdirection play amid a drumbeat of controversy, but Zuckerberg seems focused on reducing his company’s reliance on other platforms, and he has a point. There’s a pretty good chance you use Facebook and Instagram on an iPhone or Android device, on which the company must give away slices of its business to Apple and Google. This is a more severe step than Google creating Alphabet as a holding company—this is Zuckerberg betting he needs to build something bigger and better than Facebook. I’m not convinced it will work, but the Facebook CEO does have guts.
The supply-chain problems are universal. Apple said revenue was reduced by $6 billion in the quarter due to parts shortages and Covid-related manufacturing issues in Southeast Asia. Apple CEO Tim Cook told investors that the manufacturing woes have since eased. Still, Cook, who once managed logistics for Apple, declined to speculate on when the parts shortage might end. Indeed, he cautioned that Apple could lose even more revenue to the parts problem in the December quarter. It’s not just Apple. Parts shortages plagued almost every hardware company that reported this past week, including printer maker Xerox (XRX), disk-drive giant Western Digital (WDC), and conference phone maker Poly (POLY).
The problem isn’t just chips. Shipping physical goods around the planet remains a serious issue too, with tight availability and soaring costs for both air and marine freight. Amazon called out higher shipping and labor costs in forecasting weaker-than-expected holiday-quarter results. The specialty glassmaker Corning (GLW) said it’s raising pricing across the board in response to inflationary pressures on cost of goods. That will add to pricing pressure for things like TVs, smartphones, and cars that use Corning products.
The Covid e-commerce bump is done. Amazon’s revenue growth in the September quarter dropped to 15%, from 37% a year ago. Some of that reflects supply-chain issues, but it’s not the whole story. Look at last week’s results from Shopify (SHOP) and eBay (EBAY)—e-commerce is still taking market share from physical stores, but the growth is slowing as people return to in-person shopping.
Most of these problems should eventually solve themselves... right? If you assume demand for electronics isn’t perishable, the issues plaguing Apple and others should eventually fade—when the stocks get smashed, you might want to bottom-fish. But what happens if it turns out that shortages are now endemic? Covid has exposed the surprisingly brittle nature of global supply chains, so maybe hardware stocks merit a valuation haircut. Maybe you want to own Microsoft instead.
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