While earnings season is far from over, enough tech companies have reported to provide some feel for how sales are trending in many parts of the sector.
Here are a few of the things that have stood out as tech companies large and small have reported over the last few weeks:
1. Chip Demand Is Falling in Some Markets, While Holding Up Well in Others
Companies such as Micron Technology (MU) and Taiwan Semiconductor (TSM) have made it pretty clear -- just in case all the other evidence wasn't enough -- that consumer demand for PCs, smartphones and other tech/electronics products has been softening, both due to macro pressures and shifts in consumer spending from goods to services (all of which has particularly weighed on demand for low-end products). More recently, Seagate's (STX) weak results/guidance and Corsair Gaming's (CRSR) warning have signaled a weakening in demand for chips and components going into consumer tech hardware.
And in some non-consumer markets, OEMs have begun paring chip/component inventories -- often after building them up over the last two years amid shortages -- even though end-demand is still fairly healthy. Seagate indicated on Thursday many clients are poised to cut their hard-drive inventories (Chinese customers especially). And on Friday, Morgan Stanley's Joseph Moore reported (while downgrading Micron to an "Underweight" rating) Micron customers "are taking a more aggressive approach to inventory management" after Micron said on its June 30 earnings call that its own inventories will grow in the near-term.
On the other hand, both Micron and Taiwan Semi indicated they're still seeing good end-demand from data center and automotive end-markets. And whereas Micron and Seagate issued soft quarterly sales guidance, Taiwan Semi issued above-consensus quarterly guidance and hiked its full-year outlook.
In a chip demand environment like this, I think there's value in staying selective about which chip suppliers one invests in. On the whole, companies whose sales skew towards auto, industrial and/or cloud data center end-markets -- and which aren't selling commodity products prone to seeing big price drops when demand starts falling short of supply -- look relatively well-positioned.
2. Chip Equipment Demand Still Doesn't Look Bad Overall
Chip equipment stocks plunged following Micron's June 30 earnings report, after the memory giant said (amid weakening PC/smartphone memory demand) that it's cutting its capex plans for fiscal 2023 (ends in Aug. 2023). But since then, news flow for the group has been much healthier.
During its Q2 earnings call, Taiwan Semi said it now expects its full-year capex to be near the low end of a guidance range of $40 billion to $44 billion (still well above 2021 capex of about $30 billion), but added this is due to equipment supply constraints and indicated it will also invest heavily in capex next year. Likewise, lithography equipment giant ASML (ASML) cut its full-year sales guidance due to revenue recognition delays caused by supply constraints, but also reported strong backlog growth and indicated its capacity is largely booked through 2023. And a couple of smaller chip equipment makers, Camtek (CAMT) and Axcelis Technologies (ACLS) , respectively said they now expect their Q2 sales to be at the high end and above their prior guidance ranges.
Admittedly, BE Semiconductor (BESIY) , a supplier of chip assembly equipment, did issue soft Q3 guidance. And it wouldn't be surprising to see other memory makers, such as Samsung and SK Hynix, also signal that they plan to cut their memory capex.
Nonetheless, demand for wafer fabrication equipment (WFE) among non-memory chip manufacturers still looks pretty solid, thanks to factors such as greater capital-intensity for leading-edge manufacturing processes, catch-up spend for mature processes and efforts (aided by subsidies) to localize more chip production. And with many chip equipment makers now sporting high-single-digit or low-double-digit forward P/Es, their shares now arguably have a low bar to clear.
3. Software Spend Is Softening a Bit
IBM's (IBM) software division missed its Q2 revenue consensus, and (after accounting for an increase in the forex hit the company expects this year) Big Blue lowered its full-year, dollar-based, revenue guidance. Meanwhile, SAP (SAP) effectively did the same by keeping its full-year, euro-based, revenue guidance unchanged, and said on its call that its sales of traditional software licenses are getting stung as macro uncertainty accelerates the long-term shift towards cloud software spend.
One could point out here that IBM has been a long-time share donor in software (among other places), and that SAP's commentary doesn't sound that bad for cloud software/SaaS pure-plays. But cloud customer survey software provider Qualtrics (XM) also lowered its full-year guide, while mentioning on its call that it's seeing some lengthening deal cycles, and Bill McDermott, CEO of cloud IT service management software giant ServiceNow (NOW) , also suggested macro fears are affecting deal activity.. And Qualtrics and ServiceNow's commentary is increasingly backed up by sell-side research and other data pointing to reduced software deal activity.
Software is still taking IT spending share, and the reliance of SaaS businesses on recurring revenue streams does protect them some during a downturn (not to mention appeal to potential acquirers). But with deal activity apparently slowing -- perhaps more so outside of high-priority areas such as security -- more guidance/estimate cuts for the sector are likely on the way. And while some software firms are now arguably pricing in some bad news, some still carry elevated valuations.
4. Online Ad Spend Is Getting Hit Hard - Particularly for More Discretionary Types of Ad Buys
Snap's (SNAP) Q2 shareholder letter -- in which the company declined to provide Q3 guidance and said its Q3 revenue is flat year-over-year to date -- more than confirmed fears that digital ad budgets are getting cut as various businesses tighten their belts. Twitter's (TWTR) Q2 report, in which the company posted a $140 million revenue miss and (citing its pending/disputed deal to be acquired by Elon Musk) declined to provide Q3 guidance, also didn't do much to calm investor nerves.It's worth noting that both Snap and Twitter have strong exposure to brand ads and app-install ads. The former has long been an early casualty when businesses get nervous about macro conditions, and the latter is apparently getting stung by a mixture of macro pressures, Apple ( AAPL) user-tracking policy changes and much tougher financial conditions for many public and private tech companies.
Demand trends might not be quite as bad for some larger online ad players. Last week, online ad agency Tinuiti shared reasonably good Q2 data for its clients' Google (GOOGL) search ad spend, albeit while reporting a meaningful drop in the annual growth rate for their YouTube ad spend. Nonetheless, at a time when many firms are eager to cut costs and a tight job market often makes them reluctant to conduct major layoffs, it's easy to see many of them paring their ad/marketing spend, at least for a little while.
5. A Strong Dollar Is a Big Headwind for U.S. Multinationals
This shouldn't be a shock to anyone who has been tracking the dollar's performance against currencies such as the euro and the yen. But all the same, some of the forex hits being disclosed this earnings season are pretty eye-popping.
Forex was a 7-percentage-point headwind to IBM's Q2 sales growth, and a 4-point headwind to Netflix's (NFLX) Q2 growth. In addition, the companies respectively forecast 8-point and 7-point forex headwinds for Q3.
Look for a number of other U.S. tech companies with significant international sales to report seeing similar top-line pressures on account of a strong dollar.
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