Opinion: Big Tech shows that it’s good to be big as a growth slowdown translates into stock gains while smaller peers are in pain

Opinion: Big Tech shows that it’s good to be big as a growth slowdown translates into stock gains while smaller peers are in pain

After supercharged, doubly digital growth during the pandemic, results for the five largest US tech giants this week showed a slowdown as they struggled with inflation, a looming recession and an overall slowing economy, but they were bailed out by Wall Street because of their size shows their strength.

Last week, all Big Tech reported second quarter earnings and the results were mixed, with a big miss at Meta Platforms Inc. META.
affect the combined results. But even with the stronger Apple Inc. AAPL results,
Alphabet Inc. GOOG,
Amazon.com Inc. AMZN,
and Microsoft Corp. MSFT,
Total combined revenue was $354.5 billion before traffic acquisition costs at Alphabet, a 6.91% combined growth rate, compared to $331.64 billion in combined revenue in the June quarter a year ago.

Each giant had slower sales growth, and Meta had its first-ever sales decline. And while analysts touted Apple’s iPhone as “resilient” amid widespread economic uncertainty, sales growth in the June quarter was weak at 2%. In contrast, sales rose 36% in the June quarter a year ago. Alphabet, which reported pre-TAC revenue growth of 62% in the June quarter last year, posted revenue growth of 13%, or 16% at constant currencies, as digital advertising spend declined. Amazon posted a slightly better-than-expected 7% increase in sales, compared to 27% sales growth in the second quarter a year ago. But CEO Andy Jassy issued a hopeful statement, saying he’s seeing sales up, which also helps.

The profits were even worse. As Amazon reports another net loss on its Rivian Automotive RIVN,
Investment and Meta reported a whopping 36% drop in net income, the Big Five’s net income totaled $56.9 billion, down 24% from last year’s net income of $74.9 billion, as higher costs pushed their bottom line down less revenue growth.

Meta’s large decline in net income after a 101% year-over-year rise in net income in the second quarter was particularly steep as the company happily touts CEO Mark Zuckerberg’s unproven vision of the Metaverse. Its Reality Labs, the business unit focused on virtual and augmented reality, posted a $2.8 billion loss on sales of $452 million. Ad revenue couldn’t fully compensate, falling slightly as Zuckerberg said the situation was worse than a quarter ago.

Still, Meta stock will end July as a basically even month, down less than 1%, down less than 1%, the worst performance of the Big Five. Apple stock is up more than 19% in July, Amazon is up more than 28%, Microsoft is up 9% and Alphabet is up almost 7%, all but Meta are up on their earnings reports.

Facebook’s parent company has been spared from the slaughter of other digital advertising-based companies like Snap Inc. SNAP.
whose shares are down nearly 25% in late July and set to continue a rapid decline that includes a 50% plunge in May after executives warned of the big slowdown in advertising, which is also affecting Google and Facebook.

This split between the dominant big tech platforms and the smaller companies trying to compete is likely to continue. While they all see slow growth and unclear prospects for the immediate future, the sheer size and billions of dollars in revenue and revenue generated by Big Tech will continue to largely insulate these behemoths from the kind of pain the Wall Street Deals Snap, Roku Inc. ROKU,
and other.

More Info: Read more about Roku’s “frankly awful” earnings

As a reminder, for full-year 2021, the Big Five reported annual revenue growth of 27% and a whopping 55% net income growth as they combined generated over $1.4 trillion in annual sales. At the time, MarketWatch pointed out that this wasn’t normal growth, and in fact, this may have been the year technology skipped the shark.

With most of the conference calls centered on the hot topics of containment, cutting costs, slower hiring or downsizing, and macro uncertainty, investors for the most part seemed happy to avoid worse-than-expected results for big tech. For the rest of the tech, however, there are many more questions ahead as we move into earnings season with many more reports.

Leave a Reply

Your email address will not be published.