The first quarter reports of the tech giants indicate that the crisis is already here

The first-quarter reports of the technology giants, this time released within one week at narrow intervals, have largely become a significant historical event. As of last week, these are no longer concerns about rising interest rates or various options as a result of rising inflation or a war raging in the global wheat basin. The backlog of reports of the first quarter was the opening signal of the global crisis, in which the technology giants are no longer the leaders of global growth, but the generators of the downturn in the markets.

Since the opening of trading, the S&P 500 has dropped close to 4% of its value, and the Nasdaq has fallen by 4.5%, after a drop in shares Amazon Of 14%. Besides Microsoft and Tesla Reported most of the technology giants – in them Google , Dark , Meta , Intel , Netflix And Amazon for disappointment in the markets: whether it’s a drop in sales, an ongoing crisis in the supply of raw materials and components as well as gloomy forecasts.

To a large extent, the first quarter of 2022 symbolizes Warren Buffett’s famous statement made in March 2020, with the outbreak of the corona plague: “When there is a tide, there is no problem going to sea. Only when the low tide comes, you see who swims naked.”

Amazon has become a symbol of the era

The first to be hit by crisis situations is the retail market, which indicates a sense of fear – or lack thereof – among consumers and the capital available to them today and further down the road for shopping for their households.

In this context, Amazon’s performance seems to have been taken from the economy numbers. The company reported a weak first quarter and even warned of weaker-than-expected sales in the current quarter as well. Sales missed forecasts and rose 7% to $ 116.4 billion, and the company also provided a disappointing forecast for the current quarter. Operating income was also lower than expected due to fuel costs and as a result of the aggressive expansion in warehouse operations. The loss recorded by the company was large, but was also explained by the adventure of acquiring the autonomous truck company Rivian.

“Over the years, Amazon has been a particularly unprofitable company in the retail segment,” says Shahar Carmi, Psagot Investment House’s technology analyst. “North America may have been a lucrative territory, but its cash machine was the cloud sector, which is still showing good growth. In e-commerce, however, it is difficult to make money, and when there is high inflation reflected in increasing costs of fuel, shipping, wages – including attempts by “Incorporation in recent weeks – the whole operation is becoming more expensive. Someone will have to pay for it in the end, and if it is not Amazon, it will be the suppliers who will have to receive less or the consumers who will be required to pay more.”

Shahar Carmi, Technology Analyst at Psagot Investment House / Photo: Moshik Brin

Apple sales may have beaten forecasts, and despite the lack of chips and electronics, iPhone sales have grown impressively by 5.5%, but even it has sent some worrying warning signs about the coming quarters. Problems with the supply chain will deduct between $ 4 billion and $ 8 billion in revenue in the current quarter. This becomes clear with the schedule: plant shutdowns in China due to a re-eruption of the corona, including the Foxconn plant in Shenzhen, began only towards the end of the first quarter, which did not particularly affect the pace of new device sales. But the crisis in China is only getting worse with a formidable closure in Shanghai with no solution on the horizon.

The one who added fuel to this fire was Intel, which is very sensitive to the retail market due to its exposure to the personal computer field on the one hand, and problems in the production chain among computer manufacturers in China on the other hand. Intel reported a decline in revenue and continued with a dismal outlook for the second quarter as well. The company’s CEO also warned that the shortage in the chip market is not expected to end next year, but to continue into 2024, partly due to production restrictions of factories and the construction of new factories, as well as the purchase and construction of equipment for them.

The weakness of households, which was reflected in the gloomy forecasts of both Amazon and Apple, was revealed a week earlier in Netflix reports – which marked increasing competition between the streaming services of Netflix, Disney, Hollow and HBO owned by AT&T. The fact that the streaming market’s flagship has been so strongly halted, combined with the confusion and embarrassment that gripped it in the business model framework in which it operates – expressed in its willingness to harm product quality by eliminating household billing and advertising integration – has brought New York Times “call Netflix the worst stock in S&P this year.

“Netflix was previously priced as a growth company that can reach a billion households with bargaining power that will allow it to raise the price forever. It is now clear that Netflix is ​​no longer the growth company we all knew,” says Carmi. “It’s moving to another phase where it will trade at modest multipliers than before.”

Clouds are darkening

The growth giants have found the tech giants in selling software and equipment to other organizations. Cloud computing – a service offered by Amazon, Microsoft and Google to businesses such as banks, high-tech companies or government offices, to encourage them to replace their computing infrastructure with remote servers in exchange for monthly service fees – is considered one of the technology industry’s biggest growth engines in recent years. Companies still continue to show good growth in this area as well, with an average of 34% per year.

This is a steady growth and at a fairly high rate, although it is lower than those recorded in recent years, another sign that the appetite for services and technological products in the post-Corona era is already here. While Google’s cloud service revenue is approaching $ 6 billion for the first time, double revenue in the field just two years ago, the growth rate compared to the same quarter last year, 41.4%, is a two-year low. Revenue from competing services Amazon AWS and Microsoft Azure also rose impressively, but showed low growth relative to each quarter last year.

However, for Microsoft in particular, these are particularly encouraging results. The company has narrowed its gap with Amazon – which is considered a pioneer in the field – and at such a pace may even overtake Amazon within a few years. According to research firm Canalis, Amazon still leads the cloud computing market, followed by Microsoft with a 21% share of the market, and Google with 8% of it.

In the event that the cloud market continues to slow down its growth, this will also affect other companies that make a living from server farms – the same sites where the same giant servers are located that remotely provide computing services to Amazon and Google customers. Intel, and Mellanox, for example, are some of them, building their growth on supplying different chips to servers and managing the communication between them in the various farms. Intel is still growing by 20% a year on the enterprise market alone, and it is possible that its large investment in this field will actually benefit it in the long run. Still, if households have begun to reduce their consumption, the trend may even reach the corporate market within a quarter or two, which is likely to ultimately affect the cloud market as well.

Users are no longer captives of digital advertising

First quarter reports also carry a line in the field of digital advertising. Although Facebook and Instagram managed to show an increase in the number of users, for which Meta won an increase in its share price – although this was far from correcting its historical value from before February 2022 – but the two failed to beat analysts’ forecasts for advertising revenue. Google has also reported a slowdown in advertising revenue, which is already a general trend in the market.

The “stay-at-home stocks,” which soared as users were locked behind screens for fear of contracting in Corona, are now declining, as more and more users are adopting a hybrid work style and returning to their normal life routine. Facebook and Google are now paying not only the price of moving out of homes, but also Apple’s new privacy policy, which has hurt Facebook’s ability to collect information about users on its platforms. Google has also subjected itself to a new privacy policy in which it removes third-party apps that track users from its stores.

“Google and Facebook were two giants that dominated the advertising industry exceptionally, but only Google enjoys being sitting on an end product – that is, a smartphone using its Android system,” says Carmi. “Facebook is more like a conduit between platforms and users, which has made it more vulnerable to Apple devices. Stone is addressing this through the promotion of the Oculus reality glasses – where it hopes to dominate the platform. The advertising market as a whole will continue to grow, it will go nowhere. Netflix also wants to enter the field. ”

The direction is clear

The backlog of quarterly reports released daily by the technology giants that were once considered Silicon Valley’s biggest growth engines, is the hallmark of the market’s face of a clear trend: decline. Investors caught the message: Amazon has suffered one of its biggest declines in value in history, with a 23.8% drop in its share price, the worst month since the 2008 banking crisis, in which Lehman Brothers collapsed and the US mortgage bubble burst. Together with Google and Netflix, Amazon has led all major technology and industry indices to a historic collapse.

“In the last two years, large amounts of available and liquid money have been circulating here – thanks in part to Corona, which brought with it grants and incentives, and thanks to low interest rates that pushed a lot of capital into the market, which in itself generated inflation,” says Carmi. “All this is intensifying with the war in Ukraine which is only pushing prices even further up, and with such a level of inflation, the American Fed has no choice but to raise interest rates.

“Historically, such a trend leads us to a recession. If we also take the recent reversal of the yield curve, where the yield on two-year government bonds exceeds that of ten years, as well as data shrinking various indices in the economy, declining capital market multipliers and declining capital The liquid – all this indicates that the individual consumer will be able to purchase less and less. However, based on recent years, the crises are short-lived, and it is possible that by the end of the year we will see the end of the process of raising interest rates, and it is possible that we will then be in a completely different place. ”

By Editor

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