Tech earnings are coming and they probably won’t be pretty

CNN

By Clare Duffy, CNN Business

After months of layoffs, hiring freezes and other cost-cutting measures, big tech companies are set to provide the most detailed look yet at just how bad things have gotten for their businesses amid fears of a looming recession.

Snapchat’s parent company, which tanked much of the tech sector in May with a warning about a worsening economy, is set to report third-quarter earnings on Thursday. Apple, Amazon, Facebook-parent Meta, Microsoft, Twitter and Google-parent Alphabet will each report earnings results the following week.

“People probably should be bracing themselves for these results,” said Scott Kessler, technology global sector lead at research firm Third Bridge Group.

For years, the giants of Silicon Valley seemed almost immune to swings in the global economy. Even amid a pandemic, a trade war and other geopolitical uncertainty, the biggest names in tech only seemed to grow bigger and richer. But like other sectors in recent months, they have faced a variety of new challenges.

Rampant inflation is eating away at consumers’ paychecks and reducing their ability to spend freely on tech products and services. Increased costs and recession fears have cut down on demand for online advertising and enterprise tech services. And other macroeconomic issues such as continued supply chain snarls and higher interest rates are stunting growth, analysts say.

To make matters worse, tech companies must also confront the growing strength of the US dollar, which is currently trading at its highest level in two decades. That can mean sales made overseas are not worth as much, according to Angelo Zino, senior industry analyst at CFRA Research. A stronger US dollar may also make hardware products from companies like Apple less affordable for foreign consumers, which, as Zino points out, is problematic given “most of these companies are generating more than half their revenue outside the United States.”

In a striking shift, most of the big tech companies are now expected to report slowing profit and revenue growth, or even year-over-year declines, for the three months ending in September, according to analyst estimates.

Amazon, which is projected to be in the best shape, is expected to post essentially flat sales from the year prior. Meta’s revenue is projected to fall 5% year-over-year, marking the company’s second consecutive quarterly revenue decline. Net income at Meta, Amazon, Google and Snap is also expected to be down from the year prior.

These dour projections come after many tech businesses were already showing signs of weakness in the prior quarter. Meta in July posted its first year-over-year quarterly revenue decline since going public in 2012 in large part due to decreased demand in the online advertising market that fuels its core business. Twitter, Snap, Google, Apple and Microsoft all also reported that shrinking ad budgets had taken some toll on their June quarter earnings.

“We compare investor negative sentiment on tech today to what we have seen only 2 other times in our decades of covering tech stocks: 2008 and 2001,” Wedbush analyst Dan Ives said in a note to investors this week, referring to two prior recessionary periods.

Many of the issues currently weighing on tech companies are unlikely to let up anytime soon, which is why industry watchers will be paying close attention to the guidance these companies offer for the rest of 2022.

“More than anything, people really want a good understanding about what to expect” from the final three months of this year, which has “historically been the most important quarter for these companies,” Kessler said. Investors will likely want to know, for example, whether the online ad market has begun to stabilize ahead of the crucial holiday season.

Negative results or future outlook could lead to increased pressure on tech firms to focus on their core businesses and cut back on big bets that aren’t expected to quickly product returns. Some of that is already underway.

In recent weeks, Google announced it would shut down its gaming service Stadia, Amazon said it would stop testing a home delivery robot and Meta shut down its newsletter product, Bulletin.

Meta may be in a uniquely difficult position. Last October, Facebook rebranded as Meta and ramped up investments to build a future version of the internet called the metaverse, which isn’t expected to be fully realized for years, if ever. But the Wall Street Journal reported last month the company was quietly reducing staff — and some analysts expect more cuts to come.

“I do think you’ll see them announce cost cuts. I think they’ll reduce the workforce,” Zino said. “Meta is really boxed in a corner here. Their core business is in an environment where they’re not going to see much growth at all … and they don’t have any major revenue center outside of advertising.”

What a difference a year makes.

The-CNN-Wire
™ & © 2022 Cable News Network, Inc., a Warner Bros. Discovery Company. All rights reserved.