Big Tech is still braving the storm

Is the US falling into a recession? The question is currently driving economists and investors around the world. The quarterly figures of the country’s large technology companies were expected to provide clues to an answer this week. With a combined market value of $8 trillion, Apple, Amazon, Microsoft, Alphabet and Meta are the driving forces of the American economy. As is well known, when there is a crisis in Big Tech, the rest of the world’s largest economy soon falters too.

In fact, inflation, the Covid restrictions in China, the war in Ukraine, and the ongoing supply chain problems are hitting the companies, that was common to all investor talks this week. But the bottom line is that most tech companies are well positioned to weather the macroeconomic woes — at least for now.

“Services” are booming at Apple

At Apple, the second most valuable company in the world after Saudi Aramco, earnings fell 11 percent in the spring quarter — but that was better than the company had predicted earlier in the year. Corona-related factory closures in China and ongoing problems in the global supply chain weighed on sales of iPads and other hardware, said CEO Tim Cook. All the more it pays off for Apple that the company has expanded the service sector in recent years, which is now growing and thriving impressively (+17 percent compared to the same quarter last year). 825 million paying customers are currently subscribed to one of Apple’s “Services”, said CFO Luca Maestri.

Video streaming, fitness courses, computer games, music, loan offers – strategically Apple is expanding into all areas of life. Meanwhile, the services are the second most important pillar of the group, after the iPhone. This is and remains a huge success story for Apple. The iPhone again accounted for almost half of the $83 billion in sales between April and June. Overall, it was the spring quarter with the strongest sales in the history of the group. Shareholders were also pleased with Apple’s performance, with shares up 3 percent in after-hours trading on Thursday.

The strong dollar is affecting everyone

A stumbling block for all corporations is the currently very strong dollar, which is at a 20-year high compared to the euro. That cost all companies a few percentage points in profit and sales – including Microsoft, as CEO Satya Nadella explained this week. Without the appreciation of the dollar, sales would have increased not only by 12 percent ($52 billion), but by 16 percent; and earnings ($16.7 billion) would have been up 7%, not 2%, from the year-ago quarter.

Microsoft also felt the loss of production in China, because the Windows operating system is installed on numerous computers manufactured there. As a result, sales of Windows dropped by $300 million. The war in Ukraine, which has been going on since February, is also continuing to affect business; the shutdown of the business there cost Microsoft $126 million last quarter.

The cloud business, in which Microsoft is the world’s second largest provider after Amazon, continues to be a mainstay of the group; with a growth rate of 40 percent, however, it is no longer booming like it was in the middle of the corona pandemic. Nadella, however, was optimistic that even in times of economic crisis, the cloud business would continue to grow because more companies would move their data to the cloud to save costs instead of operating expensive data centers themselves.

The digital advertising market as a harbinger of the economy as a whole

Microsoft’s social network Linkedin and its own search engine Bing also recorded a drop in sales of 100 million dollars as the global advertising market gradually weakened somewhat.

This was also the focus when Alphabet published its quarterly figures on Tuesday. The Mountain View group is known to be the largest provider of digital advertising in the world and is therefore considered a harbinger of how things are going in the sector. When the economy is bad, companies often cut their digital advertising first; In comparison, TV advertising blocks have a longer lead time and cannot be saved so immediately.

But Alphabet’s advertising business also grew in the spring by 13 percent to $40.7 billion in sales. However, the advertising business on the YouTube video platform was already growing more slowly (+5 percent) than in the same quarter of the previous year (+14 percent). Overall, Alphabet posted a profit of $16 billion, down 14 percent from the prior-year quarter, and revenue of nearly $70 billion (+13 percent).

Advertisers doubt Facebook and Instagram

However, the situation is different at Facebook’s parent company Meta, another giant in the digital advertising market. Apparently, advertisers increasingly trust Meta to reach the target groups that are relevant to them; especially after changes in Apple’s iOS operating system last year meant that Meta could siphon off less customer data.

This is fatal for the group, because Meta makes 98 percent of its sales with advertising. The past quarter was correspondingly bad: For the first time in the company’s history, Meta reported a drop in sales of $28.8 billion (-1 percent). CFO David Wehner pointed out that if the exchange rate had remained constant, there would have been an increase of 3 percent. But profits also collapsed year-on-year to $6.7 billion (-36 percent).

“Let’s be honest, companies are thinking carefully about where they’re spending their advertising budgets,” said Mike Proulx of market research firm Forrester. “Facebook and Instagram used to be where every company wanted to be, but that’s just not true anymore, especially when you’re trying to reach Gen Z.” In particular, the video platform Tiktok from China, with 1 billion monthly active users, is now competing with Meta. According to reports from the Wall Street Journal, Tiktok is likely to make $12 billion in advertising revenue this year – three times as much as in 2021.

In calls to investors, CEO Mark Zuckerberg tried to downplay the company’s problems. In flowery words, he described Meta’s plans for the Metaverse, a new virtual world that numerous tech companies are working on. But whether and when this will happen is completely unclear. What is certain, however, is that many advertisers apparently no longer trust Facebook to reliably reach their target groups.

Amazon suffers from declining online shopping

The problems are also increasing at Amazon at the moment. For the second quarter in a row, the Seattle-based group recorded a loss (-2 billion dollars). Sales ($121 billion) are also growing for the second quarter in a row, as slowly as we did 20 years ago (+7.2 percent).

The world’s largest online retailer is currently suffering from the fact that inflation is increasing business costs for Amazon itself, while also driving up the cost of living for customers and crippling consumer spending. Many customers are also now shopping in traditional retail outlets again and less online.

In addition, Amazon is struggling with the aftermath of the pandemic, as the company was overwhelmed by the demand for online orders and massively hired workers and built department stores. the Fixed costs of this extension weigh on the group now that revenue is falling.

However, the group as a whole has once again benefited from the fact that its AWS cloud business is thriving; Amazon is the global market leader in this segment. Even the advertising business in which Amazon becoming an increasingly important playergrew significantly to $8.8 billion (+18 percent).

With 1.52 million employees, Amazon is the largest employer in the USA. The group has announced that it intends to reduce its workforce – and the other tech companies also said last week that they would hire fewer and more selectively from now on. Apparently, preparations are being made for the coming months to be even more turbulent.

The NZZ correspondent Marie-Astrid Langer follow on twitter.