Earnings season has been a decidedly mixed bag for the tech sector so far.
It hasn't been as bad as what some die-hard bears expecting a big recession to arrive soon have been predicting. But -- at a time when many tech stocks are up a lot in 2023 and inflation and a hawkish Fed remain headwinds for equity valuations -- some of the things that have been disclosed should give pause to bulls expecting markets to take off again.
Here are a few high-level takeaways from what's been shared by tech companies thus far during earnings season.
1. Digital Ad Spend Looks Better Than Feared - At Least for Larger Players
Meta Platforms (META) topped Q1 sales estimates -- reporting 4% annual Q1 ad sales growth following a 4% Q4 decline -- and issued better-than-expected Q2 sales guidance. Alphabet (GOOGL) posted flat ad sales growth following a 4% Q4 drop, thanks largely to better-than-expected search ad revenue. And Amazon.com (AMZN) saw a better-than-expected 21% increase in ad revenue, slightly improving on Q4's 19% growth.
On the flip side, Snap (SNAP) posted a worse-than-expected 7% annual revenue drop and provided an "internal revenue range" for Q2 that implies a mid-single-digit annual drop. Pinterest (PINS) topped sales estimates on the back of 5% growth, but also suggested it expects its Q2 growth to be similar (consensus estimates were a little higher). And Roku (ROKU) reported its "Platform" revenue (much of which involves ad sales) was down 2%.
Overall, digital ad spend appears to be stabilizing - and in some cases, improving a bit - after a few rough quarters. But it's also fair to say that larger players are doing better overall than smaller players. Some of this is likely due to many advertisers being more risk-averse in the current environment and thus opting to direct more of their budgets towards the largest ad platforms. And some of it could also be due to the payoff that firms like Meta and Google are seeing for large investments in AI-based solutions for improving ad targeting and measurement.
2 Big, 'Incumbent,' Software Firms Are Beating Estimates More Than Smaller, Growth-Stage, Software Firms
Microsoft (MSFT) , SAP (SAP) , ServiceNow (NOW) and IBM (IBM) all reported above-consensus software sales numbers, with the first three companies also providing software sales guidance that was moderately better than expected. Microsoft noted its software bookings are benefiting from strong renewal activity; SAP and IBM each indicated demand for mission-critical software remains healthy; and ServiceNow suggested it's benefiting from efforts by clients to "consolidate" the number of software vendors they rely on.
By contrast, some relatively small, growth-stage, software firms, such as Cloudflare (NET) , Alteryx (AYX) and Tenable (TENB) , have seen their shares hammered post-earnings, thanks in large part to disappointing Q2 and full-year sales outlooks. And on their earnings calls, each company noted it's still seeing a difficult environment for closing new software deals, with Cloudflare and Tenable noting the deal environment is particularly tough among tech and financial services firms.
While there are exceptions to the rule, larger, established, software firms that depend to a large extent on healthy renewal activity seem to be having an easier time meeting or beating estimates in the current IT spending environment than many smaller firms whose estimates bake in a lot of top-line growth driven by brand-new clients and deals. And it's worth noting that some of the growth-stage firms still have fairly rich valuations.
3. E-Commerce Is Showing a Bit of Improvement
While Amazon's AWS commentary (more on that shortly) led its stock to eventually trade lower post-earnings, markets seemed pleased with the company's e-commerce numbers: Both Amazon's North America and International segments topped Q1 estimates while showing decent constant-currency growth, and the company's Q2 sales guidance (possibly conservative) was in-line.
Separately, Meta and Alphabet both indicated they saw good demand from e-commerce advertisers, with Meta highlighting demand from Chinese sellers looking to reach potential customers in other markets. And though the company is still losing share, eBay's (EBAY) top-line numbers were a little better than expected.
To be fair, Amazon also noted -- amid macro headwinds and an ongoing shift in consumer spending from goods to services -- that orders for discretionary goods have been weaker than orders for "essentials." But that aside, the secular trend of e-commerce taking share from offline retail appears to have resumed, after having been briefly derailed by reopening activity.
4. Cloud Growth Is Slowing, But AI Investments Are Boosting Cloud Capex
Though slightly above the FactSet consensus estimate, Amazon's AWS growth slowed to 16% in Q1 from 20% in Q4 2022, 27% in Q3 and 33% in Q2. And on Amazon's call, CFO Brian Olsavsky indicated AWS growth has been around 11% in April (below a 13% pre-earnings estimate for Q2), as clients keep looking for ways to "optimize" their cloud infrastructure spend, at least over the short-term.
Microsoft's constant-currency Azure growth slowed to 31% in the company's March quarter, from 38% in the December quarter and 42% in the September quarter, with the company guiding on its call for 26% to 27% June quarter growth. And Alphabet's "Google Cloud" revenue -- it covers both the Google Cloud Platform and Google Workspace apps -- saw growth slow to 28% in Q1 from 32% in Q4 and 38% in Q3 (on the bright side, the segment finally turned a profit).
But in spite of their slowing cloud growth, Amazon, Microsoft and Alphabet all signaled that they expect to grow their cloud capex in the coming quarters, with Microsoft forecasting a "material" sequential capex increase in its June quarter. And each company indicated AI-related investments -- both in support of AI-related services for cloud clients and the companies' own apps and services -- are a key reason why they're taking capex higher.
Elevated capex during a time of slowing growth is bound to have a near-term impact on Amazon, Microsoft and Alphabet's cloud margins. But it's music to the ears of the companies' chip and hardware suppliers.
5. Auto and Industrial Chip End-Demand Still Looks Better Than Consumer Chip End-Demand
PC and smartphone sales still look weak, even if there's now a sign or two that demand isn't getting any weaker. And various tech and electronics firms are still also seeing soft demand for other consumer hardware, such as TV sets and smart-home gear.
But (aside from China, where an auto price war has kicked off amid sluggish demand) auto sales still look healthy, following multiple years of production falling short of demand amid chip shortages. And trends such as EV and advanced driver-assistance system (ADAS) adoption should keep growing the dollar value of chips found in the average new car for quite a while.
Likewise, chip suppliers such as STMicroelectronics (STM) and Silicon Labs (SLAB) have mentioned end-demand for "industrial" chips -- a term used by some chip companies to describe anything that doesn't neatly fit into an end-market such as cars, consumer hardware or data center or telco gear -- still often looks good, aided by trends such as IoT device growth, higher defense spending and growing factory automation and renewable energy investments.
As some chip-stock investors would be quick to note, consumer chip markets are often much further along than "industrial" and especially auto chip markets in terms of seeing customer inventory corrections, which could lead the former's sales to outperform the latter's for a little while in spite of weaker end-demand. And TSMC (TSM) did caution it expects its auto chip sales to soften in the back half of the year.
But with many chip suppliers with high auto and industrial exposure now carrying pretty low valuations -- ones that arguably price in substantial inventory corrections -- focusing more on what point a company is at in an inventory-correction cycle than on what short-term and long-term end-demand looks like in its biggest markets might amount to missing the forest for the trees.
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