Even tech giants like Amazon and Meta can’t escape the slowdown
Growth is collapsing in the tech world, and even usually invincible companies like Apple and Amazon.com can’t escape the slowdown.
With many of the biggest tech giants set to report earnings over the next couple of weeks, investors are mostly bracing for bad news. Amazon is expected to grow at its slowest pace in decades. Chipmakers go from boom times to potential glut. And gig-economy companies such as Uber Technologies and DoorDash could be victims of consumer budget cuts during a faltering economy.
Then there’s the pullback in online advertising — a shift that already ravaged sales at Snap and Twitter last week and is poised to weigh on the results of Facebook’s parent meta-platforms. The question for investors is to what extent the slowdown is already being reflected in stock prices. The tech-heavy Nasdaq 100 index is down 24% this year, Amazon is down a bit more than that, and Meta has lost half its value.
Here’s how tech industries are expected to fare as corporate earnings trickle down over the next few days:
Research firm Magna estimates the U.S. digital ad market grew just 11% in the second quarter, a sharp deceleration from 58% in the same period a year earlier. Growth will be particularly anemic for social media ads, which have been impacted by Apple’s privacy changes that make it harder to target customers.
This has left an increasingly crowded field of tech companies vying for a slice of the pie. Google and Facebook, which renamed itself Meta last year, have long been the kings of online advertising. But Amazon and TikTok are now making inroads.
Meta is set to report its first period of zero sales growth since the company went public a decade ago, along with a 33% drop in net profit. Alphabet, Google’s parent company, is expected to post its weakest sales increase since the pandemic began in 2020.
Facebook and Google “seem to be so on the back foot right now,” said Eric Franchi, general partner at AperiamVentures, a venture capital firm that invests in marketing and media startups. “Things changed very quickly.”
There are still bright spots in ad spending, said Sean Corcoran, US CEO of media agency Mediahub Worldwide. Some customers in industries such as travel and entertainment continue to spend at a healthy pace, while others are in wait-and-see mode, he said.
“It’s kind of where people are – they don’t know what to expect,” Corcoran said. “They don’t want to make the big cut. They want to keep the engines running.
Amazon isn’t just facing a historic slowdown in sales growth — it’s dealing with a hangover from its pandemic investments. When e-commerce spending surged after the Covid-19 outbreak, the company went into construction mode, doubling its warehouse footprint to meet demand. Now that shoppers have returned to physical stores, Amazon has too much capacity. It is therefore a question of subletting space and reducing its hourly workforce through attrition.
Meanwhile, profit has taken a hit. Analysts are forecasting second-quarter earnings of 14 cents per share, with total net income expected to fall 82% from a year earlier. Profitability is expected to rebound in the second half of the year as Amazon thins.
In the event of a general recession, Amazon could fare even better than its competitors, thanks to its reputation for low prices. During the global financial crisis of 2008, the company grew faster than the entire e-commerce industry.
For now, Amazon’s growth has slowed to a trickle. Revenue is expected to rise 6%, the lowest of any quarter since 2001. And if you just look at Amazon’s online store segment, sales are expected to fall for a third consecutive quarter. The company’s cloud services division should continue to be a bright spot during the crisis, helping to bolster results.
The specter of an economic recession hangs over ride-sharing and food delivery apps like Uber, DoorDash and Lyft, whose services could become more of a luxury as consumer budgets tighten. Already, corporate stocks have plunged this year, with Lyft hit particularly hard, losing more than two-thirds of its value.
DoorDash and Uber have benefited from a boom in takeout orders during the pandemic, spurring an expansion into alcohol, convenience store items and groceries. This area remains relatively strong. Delivery sales were up about 23% at DoorDash last quarter from a year earlier and 31% at Uber. Still, order volumes are down from Covid-19 highs, and competition with peers like GrubHub and Instacart is heating up.
Unlike Uber, Lyft still derives nearly all of its revenue from ride-sharing, which has suffered greatly during the pandemic shutdowns. Demand has now rebounded, but a continuing shortage of drivers has proven costly. For Lyft, plans to increase spending on driver bonuses and incentives are fueling investor concern over reduced profits.
The jitters of travel
Travel officials proclaimed for months that the summer season would be their best yet. After all, Covid restrictions have been lifted in much of the world and travelers have two years of pent-up demand.
But the summer got off to a rocky start, with strikes and staff shortages plaguing European airports and several US airlines cutting flight capacity. Add to that inflation and economic uncertainty, and the industry’s recovery could weaken.
A ferociously strong dollar is also weighing on profits, especially for companies like Booking Holdings and Airbnb. Nearly 87% of Booking’s revenue comes from overseas markets, with many sales denominated in pounds and euros, both of which have weakened this year. About half of Airbnb’s revenue last year came from overseas.
These companies continue to grow much faster than most tech giants right now. But some analysts are backtracking on their projections. Truist Securities’ Naved Khan predicts Airbnb’s third-quarter revenue of $2.71 billion, down from its previous estimate of $2.83 billion. This period is usually the company’s biggest selling season of the year.
Apple is expected to post its slowest quarterly sales growth since the early days of the pandemic. It has already warned that supply chain issues will slash sales by $8 billion over the period, and now investors are also worried about falling consumer demand. Either way, Apple’s fiscal third quarter is a tough comparison to the year-ago period, when sales jumped 36%, helped by customers stocking up on office equipment. at home during the pandemic. If there is growth in Apple’s business, it will be in online services. Analysts are expecting a record June quarter in this category, with sales reaching nearly $20 billion.
The surge in chip sales during the pandemic has led to shortages and sent the industry scrambling to add capacity. But investors are increasingly concerned that demand has peaked. This is reflected in the Philadelphia Stock Exchange’s benchmark semiconductor index, which has fallen 28% this year.
Texas Instruments will release its earnings report on Tuesday, providing key clues about the state of the industry. It has the widest product range among chipmakers and the largest customer list. This makes it an indicator for sales of everything from industrial machinery to space hardware to consumer electronics. Analysts expect Texas Instruments to post a 1% drop in sales, compared to a 41% gain in the previous quarter.
Intel, the largest American chipmaker, delivered its results on Thursday, alongside Apple and Amazon. Estimates indicate that revenue fell 3% in the second quarter, pushed down by lower demand for laptop chips. In June, Chief Financial Officer Dave Zinsner said the economy had weakened and that would affect Intel’s financial performance.
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