Opinion: A $3 trillion loss: Big Tech’s horrible year is getting worse

Opinion: A  trillion loss: Big Tech’s horrible year is getting worse

Big tech companies are taking a beating this week, to the tune of more than $255 billion in lost market capitalization that helped worsen a bad year for the once-beloved sector.

The five tech giants that released results this week have now lost a combined $3 trillion market capitalization for the year, according to Dow Jones Market Data, showing that Big Tech is not immune to the macroeconomic storm sweeping the stock market. usually.

The Big Five Tech Companies: Alphabet Inc. GOOG,
+4.30%

GOOGLE,
+4.41%,
amazon.com Inc. amzn,
-6.80%,
Apple Inc.AAPL,
+7.56%,
Meta Platforms Inc. META,
+1.29%
and Microsoft Corp. MSFT,
+4.02%
— generated $364.1 billion in aggregate revenue during the September quarter, a staggering sum that led to 9.1% growth from the prior year quarter. That growth rate may seem like a decent showing for decades-old companies, but it marked a sharp drop from the pandemic-fueled clips Big Tech has seen in recent periods. In contrast, the group experienced a combined growth rate of 25.6% in the third quarter of 2021.

Even more concerning this quarter, however, was the sharp drop in net income that was seen almost across the board. The five reported combined net income of $59.5 billion, down 17.8% from the $72.3 billion they posted a year earlier. In that quarter a year earlier, revenue growth in the Big Five soared 39.1% overall, even as Amazon saw its profits cut in half.

Overall, the Big Five brought in $1.08 trillion in revenue for the first nine months of the year, up 9.2% from a year earlier, though both net income and free cash flow were down. The gang posted $178 billion in aggregate net income in the first three quarters of 2022, down 19.7% from a year earlier, along with $150 billion in free cash flow, down 10%.

All five companies posted a decline in net income when looking at the first nine months of 2022, while Apple and Microsoft were the only two to see free cash flow growth.

Technology companies, like others in the S&P 500 SPX,
+2.46%,
They face three major issues: a macroeconomic slowdown, higher costs in an inflationary environment, and the strength of the US dollar, which makes purchases in foreign currency more expensive.

“I want to acknowledge that we are still living in unprecedented times,” Apple Chief Executive Tim Cook told analysts on the company’s call Thursday. “From the war in Eastern Europe to the persistence of COVID-19, from climate disasters around the world to an increasingly difficult economic environment, many people in many places are struggling.”

However, Apple stood out this quarter, not only because it was the only Big Tech company to post a post-earnings rise in its stock price, but also because it was the only member of the gang to actually increase net income. . (In fact, Apple stock was headed for its best single-day gain since September 2020. amid a 7% rally on Friday).

The smartphone giant’s 0.8% increase in September quarter net income was nothing to write home about compared to the 62.2% increase Apple saw in the year-ago quarter, but it was notable. in relation to the “carnage” of their Big Tech peers. The slight increase in Apple’s net income came even as the company refused to raise the prices of its iPhone 14 family despite supply chain pressures and other challenges.

Moving away, however, Apple’s net income declined for the year, down 1.1% over the first nine months, according to Dow Jones Market Data. Chief Executive Tim Cook said on the company’s earnings call that the company has seen “inflation related to logistics” and with some silicon components.

However, the internet sector made Apple’s results shine even brighter, amid competitive and macroeconomic challenges that have been compounded, from a financial perspective, by Meta and Alphabet’s determination to press ahead with aggressive spending plans. .

Meta was the only Big Tech company to post a revenue decline (-4.5%) in the latest quarter, while at the same time the company’s losses in its Reality Labs business skyrocketed to almost $10 billion in the last nine months. Net income in the quarter was cut in half and its shares sank to their lowest level in six years. on Wednesday.

The report marked an even darker chapter in a difficult year for the company, which has now seen revenue rise by just 0.2% for the first nine months of the year as net income slumped more than one 36% and free cash flow has almost completely declined. halved Meta’s financial challenges could continue as chief executive Mark Zuckerberg has promised to pour more money into its metaverse ambitions with Reality Labs spending projected to “increase significantly again” next year.

Like Meta, Alphabet is determined to spend, even though it has shown some signs that it will turn from the ways of old. The executives told analysts on their conference call that they would cut hiring levels in the fourth quarter to half of the hiring made during the third quarter. At least one Wall Street analyst said the Internet search and advertising giant should freeze its hiring, and our colleagues at Barron’s stated that Alphabet needs to go on a diet.

While investors once rewarded fast-growing tech companies for efforts to further expand their businesses, Wall Street has now sent a signal of caution. At least two big tech companies are paying attention. Amazon CFO Brian Olsavsky told analysts the company was “taking steps to tighten our belts”, and Microsoft executives made similar comments last quarter.

“While we continue to help our customers do more with less, we will do the same internally,” said Microsoft CFO Amy Hood, noting that Microsoft’s operating expense growth should “moderate materially” as it moves forward. the fiscal year.

Adding more pressure to Big Tech was the fact that one of the golden sectors of technology, cloud computing, was also slowing down. The top two cloud services companies, Amazon’s AWS and Microsoft’s Azure, saw revenue growth slowing in the September quarter, while Google Cloud saw revenue slowing from the first and fourth quarters of 2021. .

It is worth asking at this point what Big Tech should understand. Meta is worth much less than the power of Nvidia Corp. NVDA chips,
+4.99%
following the near-record plunge in internet stocks on Thursday, and has come a long way from its unique place as the fifth-largest US company by market capitalization, ranking 21st as of Friday, according to Dow Jones MarketData.

MarketWatch periodically tabulates the results of the biggest tech companies to show the scale and performance of these market titans, but it may be worth pulling Meta out of the Big Tech gang as its valuation plummets.

With or without Meta, it’s clear that Big Tech’s fortunes have changed. The great days of double-digit growth seem to be behind us for the group and investor expectations have now changed: Wall Street seems increasingly willing to reward companies for their ability to control expenses and generate free cash flow. . For now, the breakneck growth is over.

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