Nasdaq 100, the index comprising stocks that are the leaders in the technology and communication sectors, is down by almost 33% in 2022. Much of that downfall could be due to rising rates leading to a lowering of valuations. Also, is the impact the rising rate is having on the macroeconomic canvas of the economy. Digital advertising spending by corporates across various sectors and software services means the bread-and-butter business for these tech giants.
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Sheraz Mian, Director of Research at Zacks presents a 360-view of the big-5 tech companies’ revenue model and what to expect from big tech earnings as results start flowing in this week.
The quarterly report from Snap forced us once again to look for clues to help determine the outlook for digital advertising spending in the current uncertain macroeconomic environment. The rude shock from the Instagram rival puts the spotlight on other Tech leaders that are on deck to report September-quarter results this week.
Reporting this week are ‘Big 5 Tech players’ – Alphabet and Microsoft after the market’s close on Tuesday (10/25), Instagram parent Meta Platforms after the close on Wednesday (7/26), Apple and Amazon after the close on Thursday (7/27).
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Estimates for these companies came down in the wake of Snap’s Q2 disappointment and their own June-quarter results. One takeaway from the last round of earnings releases from these digital advertising platforms was that advertising customers don’t see Snap, Meta and Alphabet exactly the same way.
There are other factors at play here on top of the softening macro backdrop, including the impact of changes to Apple’s operating system (iOS), that suggests we should be careful in using the Snap disappointment as a read-through to these other digital platforms.
I deliberately kept out Apple, Microsoft and Amazon from the chart to reduce clutter in the visual, but those stocks are down -18.9%, -29.9%, and -30.6%, respectively. As we can intuitively appreciate, these three Tech leaders aren’t as exposed to the ongoing softening trend in digital advertising spending as Snap, Meta and Alphabet.
Spending by businesses under the advertisement category is not the only spending category that is exposed to negative macroeconomic developments. Tech giants like Microsoft, Alphabet and Amazon (through its Amazon Web Services or AWS arm) receive a ton of money from other companies for software and services. It is reasonable to expect those receipts to take a hit as customers get cautious in the face of macroeconomic challenges.
We will see what we hear from these companies in their Q3 releases, but historically software spending doesn’t get cut to the same extent as ad spending. Microsoft, Amazon (AWS) and Alphabet are the leaders in the cloud computing space.
Ad spending may be coming down as this week’s reports from Meta and Alphabet will reconfirm, but no one is suggesting that they are expected to lose share to your local newspaper’s classified section.
As the macroeconomic clouds clear, as they eventually will, these digital platforms will be there to recapture those spending dollars.
Beyond the big 5 Tech players, total Q3 earnings for the Technology sector as a whole are expected to be down -14.1% from the same period last year on +1.8% higher revenues.
This big-picture view of the ‘Big 5’ players as well as the sector as a whole shows a decelerating growth trend. That said, unlike this ‘quarterly view’, the annual picture shows a lot more stability.