Big Tech Has Been a Revenue Haven for Years, But Security Isn’t a Sure Thing Anymore

By Bill Peters

Earnings Watch: Alphabet, Amazon, Apple, Meta and Microsoft plan to announce crucial results amid doubts over the economy, and they will all report in the biggest week of the earnings season

The biggest week of the third-quarter earnings season will also likely be its most anxiety-provoking, as an onslaught of surefire tech giants prepare to report amid staff cuts and signs of slowing demand for digital advertisements, e-commerce and smartphone sales.

Tech investor dyspepsia begins Tuesday, with Microsoft Corp. (MSFT) and Google’s parent company Alphabet Inc. (GOOGL) (GOOGL). Facebook parent company Meta Platforms Inc. (META) reports Wednesday. Earnings from Apple Inc. (AAPL) and online retailer Amazon Inc. (AMZN) round out Big Tech’s earnings season on Thursday.

The results will follow a two-year pandemic-era digital boom that was overtaken by inflation, a stronger dollar and a greater desire to resume travel, restaurants and other aspects of pre-pandemic life. . And they come after tech stocks have been rising for years — often non-stop, and with seemingly guaranteed growth — until they hit a skid in 2022.

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Last week’s results from Snap Inc. (SNAP) were a potential prologue. Shares of the social media platform plunged after pointing to wilting digital advertising and competition from TikTok, signaling a potential cost cut ahead and failing to offer a financial outlook for the all-important season. holidays.

Concerns about a pullback in digital ad spending among companies fearful of recession are particularly worrying for Alphabet and Meta – which Bloomberg News reported last month are likely to cut staff for the first time. JPMorgan analysts pointed to weaker growth trends in Google’s core online search segment and a greater competitive threat to YouTube from TikTok. And they said they would look for signs of engagement in Instagram Reels as well as signs that Meta executives are committed to controlling spending on its vast metaverse ambitions.

Earnings outlook: Google may be the safest of the digital advertising giants, but that’s not saying much right now

“Sentiment remains cautious across our coverage universe, with slowing secular growth, increased competition and macro concerns,” the JPMorgan analysts wrote.

The FactSet forecast also gives some idea of ​​the magnitude of the earnings decline the two companies represent for the financial data firm’s communications services business.

“At the company level, Meta Platforms and Alphabet are the main contributors to the sector’s earnings decline,” FactSet analyst John Butters said in a report Friday. “If these two companies were excluded, the combined earnings decline for the sector would improve to -2.7% from -12.5%.”

Some big tech giants have already signaled that cost reductions are coming. Microsoft, for example, has confirmed plans to lay off around 1,000 workers. Ahead of the results, Zacks analysts were optimistic about Microsoft’s cloud prospects and the growth of its Teams platform as digital adoption and remote working continue. But analysts are worried about a sharp drop in PC demand.

Full earnings overview: Microsoft earnings on deck amid layoffs and recession fears

Amazon has cut costs for much of the year, and analysts expect the company to turn a profit in the quarter after two consecutive quarterly losses largely tied to its stake in the electric vehicle maker in difficulty Rivian Automotive Inc. (RIVN). Still, Wall Street remains concerned about lagging demand in its online shopping activity during the key holiday shopping season.

Amazon revenue: “The good news is that the consumer is still spending. The bad news is that they’re not spending on e-commerce.

Apple is one of the few tech giants that hasn’t been the subject of rumored workforce reductions, but there have been reports that the iPhone maker is cutting production of its core product. There are also questions about what the company’s iPhone pricing strategy – i.e. not increasing them on its new iPhone models – says about overall demand.

Apple revenue: What do the iPhone production reports really mean?

These are just the tip of a massive mountain of earnings reports to come in the busiest week of the season, with a third of S&P 500 companies and 40% of Dow Jones Industrial Average components expected to report. Besides Apple, Intel and Microsoft, Dow names reporting in the coming week include Coca-Cola Co. (KO) and McDonald’s Corp. (MCD).

See also: Stock investors brace for busiest week of earnings season. Here’s how it stacks up so far

A fifth of S&P 500 companies have reported third-quarter results so far, FactSet data shows, and 72% of those companies beat earnings expectations while 70% beat sales forecasts. . Those results, so far, have left the third-quarter earnings growth forecast somewhat higher than last week, FactSet’s Butters said in its weekly report. But the outlook was still subdued compared to what it was at the end of September.

The call to put on your agenda

Layoffs at Intel

Intel Corp. (INTC) is reportedly planning to announce “targeted” layoffs next month, according to a report from The Oregonian, which said more information on the matter could come Nov. 1. Chief Executive Pat Gelsinger, in a video to employees, reportedly said “Intel’s costs are too high and our margins are too low,” seemingly confirming a layoff report earlier this month. Intel is expected to report results after markets close on Oct. 27. The last time Intel laid off a large number of employees was in 2016.

Intel struggled with its margins as Gelsinger focused on building and improving its manufacturing efforts. Other chipmakers toned down expectations amid U.S. tech restrictions on China and a sharp slowdown in PC shipments, which are expected to post their biggest drop since record-keeping began.

See: Early chip wins gave a sigh of relief, but two more big tests are coming

Reports from Texas Instruments Inc. (TXN) and KLA Corp. (KLAC), due Tuesday and Wednesday, respectively, will also offer more nuance on the chip industry, which has also been struggling with shortages and lockdowns in China.

Numbers to watch

Car sales: Ford and GM

General Motors Co. (GM) and Ford Motor Co. (F) release their results on Tuesday and Wednesday, respectively. The results from the two automakers will offer more color on auto demand amid growing concerns over excess supply as rising interest rates and a slowing economy threaten to scare off potential car buyers .

Earnings preview: Ford has already ‘bitten the proverbial bullet’ ahead of earnings, but GM’s results could go either way

Edmunds said last month it expected U.S. new-vehicle sales to fall 0.9% in the third quarter from the year-ago period. The auto data provider said thawing chip supply chains helped replenish dealer lots. However, UBS analyst Patrick Hummel recently warned that the insufficient supply that has driven car prices higher could soon turn into oversupply.

Food prices: Chipotle, Kraft Heinz

Mexican fast-food chain Chipotle Mexican Grill Inc. (CMG) reports earnings Tuesday, and Kraft Heinz Co. (KHC) — known for foods like Heinz ketchup and Kraft macaroni and cheese — reports Wednesday. The results will give investors and consumers insight into the direction of food prices, after tensions in the agricultural industry and Russia’s invasion of Ukraine pushed up grain costs. Both companies have relied on price increases to boost sales, even though Kraft Heinz and some other consumer goods giants are selling less product overall. But some analysts have questioned how much leeway companies have to charge their customers more.

-Bill Peters

 

(END) Dow Jones Newswire

10-23-22 1609ET

Copyright (c) 2022 Dow Jones & Company, Inc.

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