Meta’s dramatic fall masks strong earnings week across Big Tech
For anyone hoping to learn from the latest earnings reports from leading tech companies, the whiplash at Snap this week has been emblematic of the wider hopes and fears that have ripped through the tech sector.
Shares in the social media platform plunged 23 per cent on Thursday as investors fretted that a weak revenue forecast from Meta, parent of Facebook, would spill over into the wider digital advertising sector. They then rebounded 60 per cent in after-hours trading when the worries turned out to be unfounded.
The end result of all the stock market drama: Snap’s shares settled back to the level they were trading at just three weeks ago.
Huge volatility has stalked tech stocks this year, sparked by the prospect of rising interest rates and a slowdown in digital demand after a spike caused by the pandemic. The downbeat outlook from Meta, which wiped more than $230bn from its market value and dominated headlines, appeared to confirm the fears that had already produced a sharp sell-off in tech stocks.
But after a blizzard of fourth-quarter earnings announcements, the mood elsewhere in Big Tech was far more sanguine. In general, demand for digital services had held up. And amid it all, the biggest tech companies — with the exception of Meta — displayed the notable resilience that has become their hallmark, in the process appearing to take market share in their core businesses.
“I don’t think the Big Tech growth story is broken,” Jim Tierney, chief investment officer for growth equities at AllianceBernstein, said of the latest crop of earnings.
A continuation of the buoyant demand for the underlying technologies that support the digital economy — cloud computing services, along with PCs and smartphones — means that “the 2022 growth runway looks pretty good for these companies,” he added.
“Things are slowing down, but it isn’t falling off a cliff,” said Brent Thill, an analyst at Jefferies. “I do think these companies are resilient.”
The curtain on the earnings season for the biggest tech companies came down late on Thursday, as news of Amazon’s earnings sent a wave of relief across Wall Street. The company’s shares surged 15 per cent in after-hours trading, even though it missed revenue expectations for its latest quarter and issued first-quarter revenue guidance below forecasts.
Amazon’s stock price bounce pointed to generally positive conditions for the biggest tech companies, even as they have faced some stronger headwinds.
Ecommerce growth has wavered as pandemic restrictions have eased, and the tight labour market has driven costs up. At the same time, advertising has turned into a profitable new sideline for Amazon and the surging demand for cloud computing, which underpins all digital services, brought welcome relief to its bottom line. Amazon also said it was raising prices for customers of its Prime service in the US — a confident display of pricing power that will directly boost its profits.
The same cloud effect was evident across the Big Tech landscape. At Microsoft, cloud revenue jumped 32 per cent, while Google’s much smaller cloud division saw revenue rise 45 per cent, though the latter barely merited investors’ attention amid a surge in the search company’s core digital advertising business. Apple also resisted severe supply chain pressures to register robust iPhone sales.
The resilience was not universally on display, however, particularly among some of the companies that benefited most from pandemic restrictions.
Netflix stumbled after reporting disappointing subscriber growth numbers, while exercise equipment company Peloton, which reports earnings next week, has already seen it shares fall by around 85 per cent over the past year.
But for many others, the earnings season brought a degree of relief. Digital advertising growth has held up well and looks set to remain robust this year, said Brian Wieser, head of business intelligence at GroupM. Privacy changes introduced by Apple in the middle of last year have complicated the picture by hurting targeted advertising at some companies, though it has been hard to assess the full impact amid mixed signals in the sector, he added.
David Wehner, chief financial officer at Meta, said the social media company expects to lose $10bn of revenue this year because of Apple’s changes. But earnings at Snap and Pinterest topped expectations, and Snap said it had already started to recover from the effects of the Apple changes.
Meta’s weak revenue forecast also raised a deeper worry: that increasing competition and unexpected limits on growth could start to weigh on some tech companies. Chief executive Mark Zuckerberg said Meta’s outlook had been hurt by competition from TikTok, prompting concern that it may be facing an erosion of audience attention.
The Meta setback is a warning sign that the potential markets for some tech products and services may not be as big as investors had come to believe, said Tierney.
Along with Netflix and Peloton, he also singled out payments company PayPal, which this week cut back its predictions for user growth after deciding that many of the new account holders it added during the pandemic were unlikely to ever be profitable. The news extended a slump that has pushed PayPal’s share price down 60 per cent, slicing $220bn from its market value.
Even if evidence from the latest tech earnings season has calmed some of the immediate anxieties about weakening demand, the worries that have brought a sharp correction in tech stock prices are likely to linger.
Though Youssef Squali, an analyst at Truist, expressed optimism about underlying digital demand, he said tech stocks were likely to remain volatile in the first half of this year as investors worry about some headwinds. These include supply chain pressures, continuing labour shortages and the risk of monetary tightening.
“I don’t think we’re out of the woods yet,” said Thill.
Additional reporting by Hannah Murphy and Dave Lee
#techFT brings you news, comment and analysis on the big companies, technologies and issues shaping this fastest moving of sectors from specialists based around the world. Click here to get #techFT in your inbox.