The world’s most important tech companies all reported their quarterly results this past week, and, in each case, the damage from a slowing global economy was in stark evidence. The witch’s brew of rising interest rates, higher fuel costs, the Russian assault on Ukraine, lingering supply-chain issues, and the U.S. dollar’s surge is infecting every tech business. “We’ll all go together when we go,” as the great Tom Lehrer once sang. Financial calamity is the great equalizer.
But last week’s batch of earnings reports also made clear that every item on that familiar list of economic woes will eventually recede, leaving behind individual corporate stories, some stronger than others.
Are we in a recession? It sure seems that way, but it won’t last forever. Some other issues are already fading. Fuel prices have been receding, for instance. And in the chip industry, worries about shortages have been replaced by fears of excess supply.
This earnings season has already had its share of disasters, but what it has provided most of all is clarity about where value lies—and where danger lurks. Here are a few takeaways on the outlook for the tech leaders.
There’s no recession in the cloud: As regular readers will recall, I’ve been consistently bullish about the power of cloud computing. Last week, I wrote a lengthy feature about Amazon.com (AMZN) focused on the long-term charms of Amazon Web Services, which I continue to view as the world’s best enterprise software business. That said, heading into the quarter, there were worries that broader economic weakness might slow cloud growth. But the bears had it wrong; AWS grew 33%, in line with estimates. Microsoft’s (MSFT) Azure cloud business expanded 46% adjusted for currency. And Alphabet’s (GOOGL) Google Cloud revenue jumped 36%, to $6.3 billion. Not coincidentally, I’d argue that Amazon, Microsoft, and Alphabet are the most appealing of the tech giants for long-term investors.
Enterprise spending continues apace: Indeed, maybe the single best moment for the financial markets this past week came when Microsoft CFO Amy Hood said on the company’s earnings call that she sees double-digit growth for both revenue and operating income for the company’s June 2023 fiscal year. Until Hood made that prediction, investors were waffling on Microsoft’s quarter, which came in a little shy of Wall Street estimates, due to the impact of currency, Russia, slowing PC and advertising sales, and so on. What she did in that moment was cut through the clutter to what matters most: short-term troubles aside, Microsoft’s business is doing just fine. With Hood’s encouragement, Microsoft holders, and investors more broadly, began to look past the recession, to better times ahead.
The future is better for some than others: Amazon provided the week’s other big surprise, actually beating its own outlook for both sales and operating income, despite softness in its online stores business. Amazon’s retail business has been hurt by short-term economic trends, but the company still dominates e-commerce. That said, Amazon bulls (like me) have been insisting for some time now that the company’s future will be driven by AWS and advertising, not e-tailing. Amazon’s best businesses are still in their early days, and the recent bearish sentiment seems poised for a turnaround.
Sentiment is also improving for Alphabet. Overall ad spending is softening, but search advertising is holding up well. Indeed, dollars are flowing away from Facebook, Snap (SNAP), and Twitter (TWTR)—which continue to have trouble targeting ads due to Apple’s (AAPL) restrictions on sharing information about users’ online activity—and toward Google and Amazon, which rely on consumers’ own expressions of shopping interests. Google Search still has no serious rival, and short-term fluctuations in ad budgets won’t do much to reduce its power, as this quarter’s results make clear.
For others, the troubles run deep: Intel’s (INTC) results fell well shy of expectations, with sales down 22% in the quarter, a reflection of the sharp slowdown in PC demand and the company’s own continued competitive losses to Advanced Micro Devices (AMD). Intel’s outlook remains complex, as it battles AMD and manages through product delays, all while trying to expand its contract chipmaking business with a $100 billion investment on new fabs. That project will help the U.S. reduce its reliance on Asian chip producers, and it might be a profitable move for Intel in the long run, but it’s no sure thing. While the stock is cheap, the risks are deep. Intel investors face years of uncertainty.
Facebook-parent Meta Platforms (META) shares have some of the same characteristics. Right now, the stock looks broken. June quarter results missed estimates, and the September guidance was worse. TikTok is stealing attention and ad dollars and Meta still struggles with ad targeting.
Like Intel, the stock looks statistically cheap, reflecting the considerable uncertainty about the company’s future. CEO Mark Zuckerberg’s rather perplexing focus on the metaverse continues to look like a sign that the company is deeply worried about its core social-networking business. Meta now feels like a lottery ticket, not a stock pick.
And then there’s Apple: Apple edged past Wall Street estimates for the June quarter, thanks in part to lower-than-expected supply constraints, which spurred higher-than-expected iPhone and iPad sales. And Apple said its revenue growth should accelerate in the September quarter, despite slower growth in its services segment. The company has a strong and growing install base, but the long-term story is now a bit fuzzy.
Before the pandemic, sales of Macs and iPhones had stopped growing. There’s little buzz so far about an iPhone 14, which is just months away. Apple is apparently still working on cars, and mixed reality headsets, and who knows what else. It’s the toughest call among the tech giants. Already the most highly valued company on Earth, Apple’s most important product dominates a mature market, and its next big thing remains entirely unclear.
You buy Apple shares because you have faith in the brand, Tim Cook, and the company’s historic ability to drive consumer demand. It’s not a Meta-style gamble, but neither does it have the power of the cloud on its side. For Apple, you gotta believe.
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