- Tech heavyweights like Meta, Amazon, and Microsoft flopped this past week, while Apple reported mixed results.
- Experts explain the obstacles in front of Big Tech, and what the takeaways from earnings are.
Big Tech companies like Microsoft, Alphabet, Meta, Amazon, and Apple just wrapped up their hotly anticipated earnings season, and experts say there's reason for concern in the sector.
Alphabet shares dropped 10% on Wednesday, Meta sank 25% Thursday, and Amazon also saw a 21% plunge. Mega-cap stocks have largely traded at a premium to the market, so a broader valuation reset could be looming, Michael Reinking, senior market strategist for the New York Stock Exchange, told Insider.
"It's clear that there are headwinds for the industry after a period of unsustainable growth coming out of the pandemic, iOS privacy changes, growing competition and macro headwinds," he said.
Apple proved to be the lone strong point among Big Tech stocks. Sean Bandazian, senior investment analyst at Cornerstone Wealth, said "there isn't something to point to within the Apple report that's a red flag for continued growth and execution."
But key themes in the past week's quarterly results aren't going away anytime soon.
Here are the biggest takeaways from Big Tech's third-quarter earnings.
Weakness in digital advertising
As the broader economy slows down thanks to the Federal Reserve's interest rate hikes, tech companies have faced a softening in advertising revenue. During slowdowns, companies often look to slash ad spend first, before bigger cost-saving measures like layoffs come into play.
Microsoft and Google parent Alphabet both raised worries on this front, and that weakness bodes poorly for the digital advertising sector as a whole.
"In challenging times like these, advertisers are carefully evaluating the effectiveness of their budgets," Google's chief business officer, Philip Schindler, said on an earnings call.
However, Reinking noted that traditional advertising agencies like IPG and Publicis have reported reasonably positive results, which suggests it's Big Tech specifically that's dealing with ad issues.
Big Tech spending
Meta, Alphabet, Microsoft and Amazon reported deceleration in key business lines, but all four insisted they will continue to invest despite the slowdown, Gil Luria, technology strategist at D.A. Davidson, told Insider.
"The common thread between the mega cap tech earnings reports this week is the companies' unwillingness to cut costs aggressively ahead of an economic slowdown, in spite of investor expectations," he said.
Meta in particular turned heads on Wall Street. Morgan Stanley analysts noted the Facebook parent's plan for $69 billion in capital expenditures over the next two years would weigh on cash flow, prompting a stock downgrade and steep price target cut.
And JPMorgan said despite the heaps of cash Meta has thrown into the metaverse, it remains unclear as to what that business will actually look like.
"This quarter has made it clear that investors are now screaming for financial discipline from these companies after a period of aggressive hiring and spending," NYSE's Reinking said.
Dollar strength
The dollar has climbed 15.6% so far in 2022 against a basket of six competing currencies, and jumped 4.7% in the third quarter.
That dollar strength cost Amazon $900 million more than expected, which weighed on third-quarter performance, CFO Brian Olsavsky said. Microsoft also cited the dollar as a headwind last quarter and said it will continue to be in the current quarter.
Apple CFO Luca Maestri, too, warned of a nearly 10-percentage-point impact, or about $12 billion, for the iPhone maker thanks to a strengthening dollar.
"Total company year-over-year revenue performance will decelerate during the December quarter as compared to the September quarter," Maestri said on Apple's earnings call.