Though earnings season isn't over yet, we've already gotten more than enough reports from major Internet, hardware, software and chip companies to make some high-level conclusions about what tech demand looks like across major end-markets.
Here are the tech business trends that have especially stood out to me while going through earnings reports and calls over the last few weeks.
1. High-End Consumer Hardware Is Faring Better Than Low-End Consumer Hardware
Though research firm IDC estimates smartphone shipments fell 3.2% annually in the fourth quarter thanks to component shortages, Apple's (AAPL) iPhone revenue rose 9%, in spite of an unfavorable impact from 2020/2021 iPhone launch timings. And Qualcomm's (QCOM) mobile processor/modem sales rose 42%, with the company attributing much of the growth to demand and share gains within the high-end Android phone market.
Likewise, though Chromebook and low-end Windows notebook sales slumped in Q4, Advanced Micro Devices (AMD) reported a double-digit annual increase in PC CPU sales, thanks both to share gains and the fact that its PC CPU sales mix skews towards mid-range and high-end parts (for comparison, Intel's (INTC) PC CPU sales fell 5%, with lower volumes more than offsetting higher average selling prices). AMD also once more reported -- amid widespread shortages of mid-range and high-end GPUs -- that its GPU sales more than doubled.
The upshot: Consumer spending on high-end tech products remains pretty robust, even as sales of various other products are softer due to weakening demand and/or chip shortages.
2. Online Ad Sales Look Fairly Healthy Outside of Meta
Meta Platforms (FB) missed Q4 sales estimates and issued light Q1 guidance, while blaming the impact of iOS user-tracking policy changes, macro pressures related to supply-chain issues and inflation, and competition (TikTok). But other major online ad players have generally shared decent numbers.
Alphabet (GOOGL) comfortably beat Q4 estimates on the back of better-than-expected search ad growth (YouTube ad sales slightly missed, but were still up 25%). Amazon.com's (AMZN) ad sales (broken out in full for the first time) rose a better-than-expected 32%, Snap (SNAP) and Pinterest (PINS) both beat top-line estimates, and Microsoft (MSFT) reported 30%-plus growth for both LinkedIn revenue and search/news ad revenue.
The iOS changes and supply chain/inflation headwinds are weighing on many online ad sellers. But for a lot of them, this is being offset by still-healthy consumer and business spending, along with an ongoing secular shift from offline to online ad spend. Also, inflation is something of a dual-edged sword: It hurts ad revenue to the extent that higher prices depress demand, but helps to the extent that it makes companies willing to pay higher ad prices to market their goods/services.
3. Normalizing Pandemic Trends Continue Weighing on E-Commerce, Gaming and Social Media Activity
While PayPal's (PYPL) disappointing results/guidance are partly due to competitive pressures, it's also clear that cooling e-commerce growth was a headwind. And while Amazon's results/guidance were better than feared, its Q1 sales outlook was still below consensus.
Meanwhile, Electronic Arts (EA) and Take-Two Interactive (TTWO) both slightly missed their December-quarter bookings estimates and issued below-consensus March-quarter bookings guidance. And Meta and Pinterest both missed their Q4 active-user estimates, while mentioning that the normalizing of pandemic-driven demand boosts was one of the headwinds that they're seeing (though admittedly, not the only one).
With Omicron cases now falling sharply and consumer spending on things like travel, dining and live events still comfortably below pre-Covid trend lines, there's a good chance that normalizing consumer behavior will keep weighing on many former pandemic winners over the next several months. That said, a lot of bad news has already been priced into the shares of some of these companies.
4. The Chip Industry's Up-Cycle Looks Unlikely to End Before Late 2022 (At the Earliest)
A slew of prominent chip manufacturers, including Taiwan Semiconductor (TSM) , NXP Semiconductors (NXPI) and Microchip Technology (MCHP) , have indicated they generally expect chip demand to exceed supply through year's end, with many of them also noting that large orders/prepayments have been made by customers to secure chip supply in the back half of the year.
Likewise major fabless chip developers such as AMD and Qualcomm still report being supply-constrained, since the wafer capacity they've secured from foundry partners isn't enough to meet the demand from the likes of cloud giants, graphics card makers and smartphone OEMs.
Like all up-cycles before it, this semi cycle will eventually end. But between the shortages that remain for many chips and the demand strength that remains across many big end-markets -- not to mention how production of the manufacturing equipment needed to address chip shortages is ironically being hampered by chip shortages -- the end of the cycle seems unlikely before late 2022 or early 2023, at least barring a big macro shock. And as a result, some of the investors who have been selling off chip stocks in recent weeks were probably too quick to call the cycle's end.
5. Software Spending Looks Particularly Strong Among SMBs Right Now
Atlassian (TEAM) and Bill.com (BILL) , both of which get a large portion of their sales from small and mid-sized businesses (SMBs), delivered blowout results/guidance in recent weeks. Atlassian's revenue growth accelerated to 37% in the December quarter from the September quarter's 34%, while Bill.com reported 85% organic revenue growth and 188% growth for its Divvy spend-management software unit (acquired last year).
By comparison, Microsoft and ServiceNow (NOW) , both of which depend more on large enterprises for software sales, posted good-but-not-spectacular numbers for their business-app franchises. Microsoft's Office Commercial and Dynamics revenue growth rates clocked in at 14% and 29% -- nothing to complain about, but down a bit from the September quarter's 18% and 31%.
One reason why SMB software spend could be outperforming right now: SMBs were more aggressive than enterprises in curtailing their IT spending during the pandemic. As a result, they might now be more aggressive in upping IT spend, as they become more confident that the worst of the pandemic is behind them.
In addition, a smaller percentage of SMB software sales involve direct sales efforts -- more of it is done either via channel partners or customers buying on their own through a website (Bill.com mentioned on its call that accounting firms have become a major customer-acquisition channel). At a time when there's a shortage of experienced software salespeople and a large portion of sales work is still being done remotely, the ability to close a lot of deals by means other than direct sales can be a comparative advantage.
6. Cloud Infrastructure Adoption Is Picking Up Even Faster Than Top-Line Numbers Suggest
Though Microsoft's "Azure and other cloud services" revenue growth slowed to 46% in the December quarter from the September quarter's 50%, its total commercial bookings growth came in at 32% in dollars and 37% in constant currency -- among the highest growth rates recorded over the last few years. The company partly attributed this growth to an increase in big, long-term, Azure contract signings, while adding these deals will help Azure's constant-currency growth re-accelerate in the March quarter.
For its part, Amazon reported that its long-term AWS contract backlog was up 61% annually in Q4 to $80.4 billion. That growth rate is soundly above AWS' Q4 revenue growth rate of 40% and bodes well for the public cloud giant's ability to keep defying the law of large numbers in the coming years.
(Apple, AMD, Alphabet, Amazon.com and Microsoft are holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Learn more now.)
