Global investors hoping big tech earnings would come to the rescue of sliding stock markets will have been left disappointed after the latest round of results. The July to September quarter was a huge earnings disappointment for big tech companies and analysts don’t see much relief on the horizon.

Big Tech kept the economy afloat during the pandemic, when the sector boosted profits, but recent earnings reports reveal that tech behemoths are not immune to the flagging economy. Inflation, rising interest rates, and reduced consumer spending are all a problem.

Months of collective consumer belt-tightening is starting to hurt, even hitting companies that have previously seemed impervious to economic vagaries. Fortunes have been built on the backs of big tech companies Alphabet (GOOG:NASDAQ), Amazon (AMZN:NASDAQ), Apple (AAPL:NASDAQ), Meta Platforms (META:NASDAQ) and Microsoft (MSFT:NASDAQ), but it’s clear that even stock market superstars are dealing with a pandemic hangover.

SHOULD YOU START BUY TECH STOCKS AGAIN?

The average share price decline for these five stocks is 38.6% year-to-date. Meta has fared worse, down 72%. Some investors will have lost patience with the sector, but others will be wondering if bad news is already in the price and now is a great time to buy.

There have been positives in the latest earnings season beyond tech which suggests the world isn’t falling flat on its face. Major US banks mostly met or beat expectations, and even streaming platform Netflix (NFLX),which took a walloping earlier in the year, showed signs of promise thanks to hopes for its advertising-backed model option.

But big tech has become so large over the past decade that it tends to dictate stock market sentiment. Alphabet, Amazon, Apple, Meta and Microsoft are worth a combined $7.13 trillion, almost 22% of the S&P 500’s $32.75 trillion market cap.

Tech earnings also offer important clues about where the economy is heading. That’s because the forward-looking, multinational industry is particularly sensitive to inflation, rising interest rates and a strong dollar.

So far, what we’re seeing is rattling investors. Alphabet, Microsoft and Meta Platforms reported that a slowing global economy was battering their businesses.

Microsoft beat expectations but reported its slowest revenue growth in five years (25 October) as rising energy costs and the strength of the US dollar cut away profits. Sales growth in its Azure cloud business – one of the company’s growth bright spots in recent years – was lower than analysts had hoped at 35%.

Azure’s revenue is largely driven by consumption, meaning that it rises as customers use the cloud offerings more. The results, and recent deal announcements, show that large corporate customers are continuing to move work to the cloud, though Microsoft’s finance chief Amy Hood said investors should expect Azure’s growth to slow another five percentage points in the current quarter.

Microsoft has succeeded in getting businesses to buy and upgrade subscriptions for suites of security services and products like Excel and Teams. The company raised list prices of product suites earlier this year and has pushed its premium offerings. In doing so, Microsoft has increased its revenue per user, which is ‘an enduring growth driver’ according to analysts at Bank of America.

ONLINE ADVERTISING IS DRYING UP

In the thick of a slowdown in advertising spending and with a potential recession looming, quarterly results from Alphabet and Meta Platforms missed forecasts and saw their share prices tumble, Meta to a seven-year low.

Snapchat-owner Snap (SNAP:NYSE) had already raised a red flag on a more difficult backdrop for advertising when its third-quarter revenue missed forecasts, sending its share price 25% lower, but the parent companies of Google and Facebook have been online ads’ dominant duopoly for years, and are seen as a bigger industry gauge.

In a glaring spotlight, Alphabet’s third-quarter sales grew just 6% annually, the slowest pace since June 2020, as executives spoke of deepening cuts in advertising spending, particularly around insurance, loans, mortgages, and cryptocurrencies.

Alphabet, for example, reported a 27% decline in profits, and Facebook-owner Meta reported a more than 50% fall.

Scott Kessler, an analyst at Third Bridge, noted that as Meta’s revenue has fallen in the past two quarters and its spending increased, its free cash flow plummeted. In the third quarter, Meta’s free cash flow was $173 million, compared with $9.5 billion a year ago.

Until recently, slowing consumer spending would have meant brands cutting non-digital advertisements but maintaining, or even raising, online spending. But with most advertising dollars now going online, that strategy is running out of road.

Wall Street is sending obvious signals that Alphabet and Meta need to tighten their own belts, bring down staff numbers and throw less money at speculative blue-sky projects but company executives seem unwilling to take drastic action.

Gil Luria, a technology strategist at broker DA Davidson, says that even in the face of the earnings drag, the likes of Meta, Alphabet and Microsoft have signalled they’ll continue massive spending.

‘The common thread between the latest mega cap tech earnings reports is the companies’ unwillingness to cut costs aggressively ahead of an economic slowdown in spite of investor expectations,’ he said.

‘We’re in for a dark winter,’ comments Brent Thill, a technology analyst with the investment firm Jefferies. From small to large, he says no one is immune from the economic challenges ahead.

One investor, Altimeter Capital, has called for Meta to slash 20% of its staff to regain investor confidence. The social media landscape remains in flux as TikTok’s surge in popularity and slowing engagement on rival platforms like Facebook, YouTube, Instagram, and Snap have led to restructuring and job cuts.

Google and Microsoft plan to slow hiring and monitor rising energy and supply chain costs. Apple has similarly noted it will be deliberate about how it expands its workforce as the economy struggles.

APPLE DOING BETTER THAN EXPECTED

Apple, famously touted by investor Warren Buffett as a company that can easily increase prices, is putting that theory to the test. It’s charging more for its streaming music and video services, citing higher costs.

The company has been far more resilient than its peers this year as iPhone sales showed impressive resilience to inflation. There were foreign exchange hits as the dollar surged against other currencies, but most analysts thought Apple’s expensive premium handsets would come under greater pressure given the strain on household budgets, yet so far that has not been the case.

Apple’s share price is down 16% this year, far from great but better than the other four big tech peers, including a near-8% rally following its latest quarterly results published on 27 October.

HOW IS AMAZON COPING?

Online e-commerce giant Amazon is exposed to weakening online advertising revenues and pressure on household budgets.

Its share price has been savaged to such an extent that the company briefly lost its trillion-dollar market cap badge in the wake of weaker-than-expected third-quarter results and cuts to guidance for the fourth quarter.

The shares slumped on the news (27 October), prompting some supporters to come out fighting. Goldman Sachs analysts said the 20% move lower in after-hours trading was ‘well overdone’ while Citi told clients to ‘take advantage of any material pullback’ in the shares.

The stock ended the following day 6.8% lower – nowhere near as bad as the initial market reaction, but still a massive one-day move for the shares which sit in so many people’s ISAs and SIPPs (self-invested personal pensions) either directly or through global equity funds.

Amazon reported a Q3 earnings per share of $0.28 on revenue of $127.1 billion, versus the consensus of $0.22 on revenue of $127.76 billion. Overall, sales rose 15% compared to the year-ago period while operating income came in at $2.5 billion with the company saying foreign exchange headwinds resulted in a $5 billion hit in Q3.

Cloud business AWS’ revenue grew at its slowest pace on record, up 27% to $20.54 billion, much lower than the 31.9% consensus growth estimate and a major slowdown compared to last year’s 39%.

Amazon shares were also hit by weak Q4 guidance as the e-commerce giant expects its revenue to come in between $140 billion and $148 billion, versus around $155 billion previously forecast. Guidance on operating income was for anything from $4 billion to zero, showing how difficult markets are right now. The consensus estimate for operating income was $4.66 billion.

Goldman Sachs analysts admitted the results were ‘mixed’, saying the worry is that Amazon’s growth has begun to slow ‘before the margin narrative is repaired’. Still, they remain bullish longer-term, with a $165 price target on the stock, albeit down from $175. That compares to a $102 market price at the end of October.

‘We are unchanged in our long-term view of the potential for cloud computing (as evidenced by Amazon’s $104 billion revenue backlog that grew 57% year-on-year) but acknowledge that economic conditions will likely produce slower than normal growth and margins in the coming quarters,’ said the bank.

Goldman’s analysts remain convinced in a multi-year operating income margin expansion story for Amazon on the back of improved e-commerce margins, less international losses and higher profit margin mix contribution from AWS and advertising.

Citi analysts also trimmed their 12-month price target, lowering from $185 to $145, but also flagged margin improvement ahead. They said: ‘The debate going forward is likely to be around margins, which we believe can improve throughout 2023 as Amazon returns to positive free cash flow and note management has prioritised AWS capex spend over free cash and transportation services this year, is culling products, and has implemented hiring freezes across certain parts of the organisation.’

Analysts at JPMorgan took note of weaker-than-expected results and guidance, but said the report was ‘not thesis-changing’.

These are the mega cap stocks to buy today

Alphabet (GOOG:NASDAQ) $94.56

Google’s parent looks well-placed to continue its domination of internet advertising, especially given the struggles being felt by the likes of Meta. But like Microsoft, it is building out a powerful and profitable cloud business that has huge potential.

Analysts remain overwhelmingly supportive of Alphabet’s growth potential, promise that is now available to investors on a price to earnings ratio below 20, which is likely to be a rare opportunity.

Apple (AAPL:NASDAQ) $153.10

Apple is one of the biggest smartphone manufacturers in the world. Device sales account for most of Apple’s revenue, but in recent years the company has also focused on higher-margin subscription services, including streaming music and video, gaming, news and cloud storage. A price to earnings ratio of 25 looks good value for its reliable growth and income combination.

Microsoft (MSFT:NASDAQ) $232.87

One of the world’s most dominant software companies with millions of businesses and private users relying on its Windows operating system to power PCs and laptops. Business applications remain its core source of profit, largely recurring because users get tied into its ecosystem, but it is also building a vast cloud computing empire that is highly profitable and still has a large growth pathway that will accelerate again when the global economy improves.

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