What did the reports of technology companies show?

The current week has been marked by great technological uncertainty from overseas. After very weak results from Snap and a panic sell-off, investors were asking themselves whether the interim results of the BigTech giants confirmed market fears of an impending economic slowdown. It turned out that, at least for now, AAA (Alphabet, Amazon and Apple) and Microsoft showed results at a relatively satisfactory level. Unlike Meta Platforms (i.e. Facebook). 

Advertising a lever of commerce ... on Wall Street

The performance of companies like Alphabet (Google) or Meta Platforms (Facebook) is largely dependent on advertising revenues, which are in turn influenced by the economic situation. As the example of Pandemic showed, in tougher economic times marketing spending is cut by companies first. As a result, there was quite a bit of nervousness on Wall Street during the period covering the publication of the financial results of the above companies. As it later turned out, they were right 50% of the time.

Investors reacted calmly to Alphabet's interim results despite the fact that they turned out to be weaker than expected, both in terms of revenue and profits. Investors' behavior can be explained by reasonably consistent YouTube ad revenue and better-than-expected revenue from Google's search engine. Solid revenues have eased concerns about the impact of the current macro situation on the advertiser's business. 

On the other side of the "advertising barricade" is Meta Platforms, or Facebook. The company is attempting a deep and costly transformation from a social platform leader to a company focused on VR/AR technology experiences as part of the Metaverse trend. The company's results confirmed that the digital advertising sector is experiencing a downturn, which the company cannot handle as effectively as Alphabet does. An environment of rising interest rates and inflation is forcing companies to scale back their spending, which Meta Platforms' business model is suffering from. The company reported that the average price per ad fell 14% year over year. In addition, the privacy feature in iOS prevents Meta Platforms from accurately monitoring in-app and online activity, complicating the company's ability to provide advertisers with data on user behavior. 

Cloud services an opportunity for PC makers

It turns out that in an era of declining PC sales, the opportunity for a computer giant like Microsoft is increasingly becoming revenue generated from cloud services. This is of particular importance to the company, as PC sales rose only 2.0% to $14.4 billion, below market estimates of $14.7 billion. The main responsible for the situation is the Chinese market and production shutdowns, which lasted until May. Again, the rising incidence of Covid -19 seems to be a significant risk factor in terms of the possible recurrence of lockdowns and the associated disruption or interruption of supply chains. Azure's cloud services growth rate slowed to 40% from 46% in the previous quarter and below estimates of 43.1%, due to slower growth in consumption of services such as compute and storage resources, according to CFO Amy Hood. On the other hand, CEO Nadella said that the number of transactions worth more than $100 million and more than $1 billion increased significantly in Q4. Despite the fact that the cloud data was a bit disappointing, revenue from Azure and other services in this segment grew 40% year-on-year, which is a positive sign. It can be seen that despite the difficult economic environment, corporate demand remains strong, which in turn should help IT manufacturers get through the expected recession.

Cloud services can be an opportunity not only for computer manufacturers but also for the retail industry in tougher times. The worsening macro outlook and rising inflation have not deterred consumers from shopping, or at least that is what Amazon's results indicate. The company reported revenue growth of 7% y/y in Q2 2022, which was slightly weaker than retail sales growth in the overall US economy (about 8% y/y in Q2 2022). Nevertheless, the company remains optimistic about the future with a forecast of 17% growth in Q3 2022 and the announcement of further progress in cost reduction. This, in turn, should translate favorably into margins and profits. The need to cut costs is increasingly being raised by retailers in the face of declining consumer power. Amazon has been consistently growing its cloud business (AWS) and getting stronger in this field. AWS revenue grew 33% year-on-year in Q2 2022, and Amazon's share of the cloud infrastructure market grew to about one-third of the total market. Amazon's emphasis on the cloud should come as no surprise - this business has much higher margins than retail. In Q2 2022, the operating margin of the AWS segment was nearly 41%! Admittedly, Amazon reported a loss of $2 billion in Q2, but this was primarily due to the realization of a loss on its investment in Rivian, which amounted to $3.9 billion in the quarter (and more than $11 billion year-to-date).

The iPhone eternally alive 

Despite the voices appearing on the Internet that the next versions of iPhones are the old model in a new package and slightly changed design, sales of "smartphones with an apple" are still doing well. Revenue from iPhone sales totaled $40.7 billion against $38.9 billion expected by the market. Despite the record revenue, however, the company's net profit fell nearly 10.5% year-on-year. The report showed that demand for the company's products remains very high despite record inflation and the resulting 'budget cuts' by households.  Apple intends to unveil new models in the fall: the iPhone14 and the Series 8 SmartWatch, which could improve sales in the fourth quarter of the year and significantly impact results in Q1 2023. Next year, Apple also intends to make its debut in the AR/VR market through a new headset design - the product to become the basis for the company to build a significant number of services and products as part of the 'Metaverse' trend. Despite the fact that Apple did not show results that significantly exceeded analysts' forecasts the market received the company's report very positively. Revenues in line with expectations and a slightly higher profit than forecasts showed that the market is estimating well the impact of the current problems in supply chains. Apple CEO Tim Cook said that the company sees improvement in China on this issue, which can be considered absolutely crucial for the company. Why? The third and fourth quarters of the calendar year are seasonally the best for Apple, so smaller problems on the supply side reduce the risk that the company will not be able to meet demand for its products in the second half of the year. 

Average, but stable

Despite the fact that BigTechs have not surprised with spectacular results and are showing the first signs of an impending economic slowdown, the technological "Old Guard" is holding up well for the time being. It seems that, at least for the time being, we should not expect a drastic decline in the revenues of the major BigTech companies, which in the short term may calm the mood and favor the rebound on the NASDAQ, which has been going on since after mid-May.

XTB Research Department