A long list of tech stocks -- everything from e-commerce and streaming names, to cloud/SaaS software firms, to chip developers that have strong PC and/or cloud data center exposure -- have rocketed higher on a belief that they can keep delivering strong top-line growth even if the economy remains in rough shape for a while.
But in reality, things often aren't that simple. When a global pandemic does enormous damage to both consumer and business spending/sentiment around the planet, even well-positioned companies are likely to feel the ripple effects. Some recent stories and reports drive this home.
On Monday, Mizuho Securities (citing data from ad agency Tinuiti) reported that Amazon.com (AMZN) has seen its high-margin ad business come under pressure since mid-March, since Amazon (though aggressively hiring right now to deal with elevated demand for consumer staples) is focused on shipping "essential" goods and a large portion of its ad sales are related to discretionary goods.
Amazon ad spend from Tinuiti clients was said to have slowed from 28% annual growth in early March to 6% growth in late March. Aside from weighing on ad sales, lower consumer purchases of discretionary goods would also weigh on Amazon's high-margin third-party seller services business.
On Wednesday, Alphabet (GOOGL) CEO Sundar Pichai sent out an employee memo in which he said Google plans to "significantly slow down the pace of hiring," as its ad sales (from all indications) come under significant pressure. And notably, Pichai also said Google "will be recalibrating the focus and pace of our investments in areas like data centers and machines, and non business essential marketing and travel."
The "data center and machines" part is particularly noteworthy here, since chip companies such as Micron (MU) and Nvidia (NVDA) have reported seeing strong cloud data center-related sales, as companies add capacity to address usage spikes for things such as streaming services and video calling apps. While some other Internet/cloud giants might act differently than Google, Pichai's comments are a reminder that cloud capex isn't fully immune to macro pressures.
Later on Wednesday, Bloomberg reported that Sony (SNE) is only planning to have its contract manufacturers make 5 million to 6 million PlayStation 5 units in fiscal 2021 (ends in March 2021). That's less than the 7.5 million PlayStation 4 units that were sold in its first two quarters of availability back in 2013 and 2014.
Though Bloomberg noted a relatively high price tag is influencing Sony's decision, it also indicated the COVID-19 pandemic is also affecting Sony's initial plans for the PS5, which will rely on a powerful AMD (AMD) processor. Certainly, the report contrasts a lot with stories about how Nintendo has been scrambling to hike production for its relatively cheap Switch console thanks to a recent spike in demand.
In line with Bloomberg's report, Taiwan's Digitimes reported on Thursday that brands selling consumer tech products such as notebooks and game consoles expect demand to start slowing in May, as the spike that immediately followed COVID-19 lockdowns wears off and the pandemic remains an economic headwind.
Separately, there have been a number of sell-side research reports indicating that cloud/SaaS software firms -- a group whose reliance on recurring subscription revenue is seen as providing some protection at a time like this -- are seeing top-line headwinds that go beyond reduced deal signings. Among other things, software firms are reportedly seeing customers in hard-hit industries such as airlines and hospitality hold off on making payments, and those customers who are willing to sign new deals are now often asking for much larger discounts relative to list prices.
Headwinds such as the ones mentioned in this article won't necessarily stop tech stocks that are viewed as safe havens from still seeing meaningful revenue growth. But they could very well lead growth to fall short of the expectations held by investors who have often been bidding up their shares to steep valuations over the last couple of weeks.