- Microsoft’s personal computing sales fell precipitously
- The advertising market continues to weaken
A quick recovery in the tech sector seems unlikely, as US giants used December quarter earnings announcements to give investors a sobering view of trading conditions for the year. despite of Microsoft (US: MSFT) Quarterly results beat analyst expectations last week, and the grim outlook on the earnings call rattled the market. Disastrous results from the chip maker soon followed Intel (US: INTC) And some negative directions from Snap (US: SNAP) That cast more doubts about the advertising market in the United States.
We are personal and mobile computingmind
Microsoft’s revenue increased 2 percent in the fourth quarter of 2022, but its operating profit fell 8 percent to $20.4 billion (£16.6 billion). Much of the hit came from increased research and development spending (up $1.1 billion), however, gross margin was largely unaffected. The diverse nature of the business means that there are significant differences in performance between departments. Beleaguered consumers are spending less, with personal computing revenue down 19 percent and Xbox content and services down 12 percent.
On the other hand, business services continued to grow. The cloud computing business, Azure, grew by 31 percent. This is slower than previous quarters but still much faster than the broader US economy. All this contributed to Microsoft exceeding analysts’ expectations for profit.
The stock price initially moved higher, but Microsoft struck a cautious tone on the earnings call. Azure cloud growth is expected to slow again as customers adjust their spending. “We expect growth to slow in the third quarter by about four to five points in constant currency,” said Chief Financial Officer Amy Hood.
At Intel, the results were much worse. Fourth-quarter revenue fell 32 percent year-on-year and gross margin fell 14.5 percentage points to 39.2 percent. Customer computing revenue fell 36 percent, and data center and artificial intelligence revenue fell 33 percent. When compared to the broader growth in cloud computing, this shows a significant decline in market share.
Shortages of chips and electronics last year quickly turned into oversupply. “The PC ecosystem continued to deplete inventories throughout calendar year 2022,” said Patrick Gelsinger, CEO of Intel Corporation.
Intel expects this to continue into 2023, with miserable guidance for the current quarter. The company expects revenue to be between $10.5 billion and $11.5 billion, which will be 20 percent lower than in the fourth quarter. The gross margin is also expected to decrease to 34.1 percent.
Apple (US: AAPL) It was the strongest of Big Tech’s companies to date, and the only one that had not yet run redundancies. However, analysts now expect slumping consumer electronics demand to impact sales. Analyst consensus forecast according to FactSet is $121.5 billion in sales — a 2 percent drop from last year. This is due to lower demand for iPhones, which could see sales drop by 6 percent.
Samsung (KR: 005930) The results, released this week, aren’t promising for Apple, which was due to release a post-publication report on Thursday, February 2nd. The Korean company supplies DRAM chips for iPhones and saw operating profit drop 70 percent in the fourth quarter. For PCs and mobile devices, “the decline in demand has been sharp across the industry as a whole,” said Jaejune Kim, vice president of the memory division.
Ad still sufswinging
Alphabet (US: GOOGL) And Meta (US: META) Both make more than 80 percent of their revenue from advertising, and sentiment plummeted last year due to declining advertising. Alphabet’s sales are expected to increase 1 percent year over year while operating profit is expected to decline 16 percent. The prospects are even worse for Meta, which is suffering due to Apple’s new privacy laws as well as the economic downturn. Sales are expected to drop 6 percent to $31.6 billion, with operating profit down 40 percent as VR losses widen to $4.4 billion.
Snap, another social media and advertising company, saw its share price drop 12 percent this week after it predicted revenue would decline between 2 and 10 percent year-over-year in the next quarter. In a letter to investors, the company said this was due to “weak demand for brand-oriented advertising.”
Amazon (US: AMZN) It is the most diversified of the tech giants. It is a consumer retail business but also increasingly an advertising business. It also has a rapidly growing cloud computing division, Amazon Web Services. Analysts expect consumer retail sales to decline, but increased advertising and cloud sales will offset this, with group revenue expected to rise 6 percent. However, higher labor costs mean that operating profits are expected to decline by 23 percent. The company doubled its workforce during the pandemic before downsizing at the end of last year.
The tech story for 2022 was rising interest rates, but now that US inflation is falling, all eyes will be on earnings. Most of these companies have already started cutting costs, but investors will mostly appreciate the companies on pricing strength. Microsoft’s focus on enterprise software and cloud computing makes it more defensive; Customers will cut advertising budgets before spending on software. Apple’s legendary brand strength helps, but there’s a limit to how much consumers can add to their wealth to buy a new iPad or Apple Watch. The chip shortage for 2021 seems like it’s been a long time coming now.