We've had arguably one of the busiest quarterly earnings seasons in history, which showed how companies are behaving in a rapidly changing inflationary environment. The overall findings seem to have been positive, and likely contributed to a bear market rally in the broad stock market, accompanied by dovish Fed signals and a lower US CPI inflation reading.
How did technology companies perform?
Companies in this category typically base their high valuations on the prospect of growth and increasing profits. That's why analysts were especially curious to see how well-known brands would behave in a difficult environment and what resilience they would show.
Alphabet (GOOG) and Meta (META) are advertising giants, but the characteristics of their businesses are quite different. The former (Google's parent company) makes its money largely from SEO and the latter from social media campaigns such as Facebook and Instagram. The companies' results showed that SEO seems to be more of a priority for customers, and therefore revenue along with GOOG's profits appeared to be more stable. Google's revenue rose 12.6% year-on-year, while Meta's fell by less than 1%, while profits fell 13.6% and 35.7%, respectively.
Despite passing some Wall Street analysts' estimates, Microsoft proved more recession-proof than expected. Bill Gates' company reported $51.9 billion in Q2 revenue (up 12.4% year-on-year) and net income of $16.7 billion (up 1.7% year-on-year).
"We continue to expect double-digit revenue and operating profit growth in constant currency and U.S. dollars," - said Microsoft CFO Amy Hood, at the earnings conference. She added that Microsoft will extend the life of its server and network hardware to six years from four years. The company made a similar move in 2020, intending to cut costs.
The biggest problems for technology companies also producing hardware, such as Microsoft (manufacturing Xbox) in addition to high exchange rates volatility, may remain rising production costs and a hard-to-quantify drop in demand due to the recession.
One company that may have disappointed many with its results and caused a big drop in its stock price was Snapchat. The platform's shares lost 39% in a single session after the results were released.
Snapchat reported a drop in revenue to $1.11 billion, compared to the expected $1.14 billion. However, earnings per share, to which investors seem to pay the most attention, instead of falling by 1 cent, slipped twice as much, by 2 cents per share. This happened despite an increase in the number of active daily users - 3.2 million more than estimated.
Snapchat, despite becoming increasingly unpopular in Central and Eastern Europe is still frequently used in Western Europe and the United States, but it has long struggled with relatively sizable revenue fluctuations and problems maintaining growth rates through app monetization issues. Additionally, with increasing competition from other platforms like TikTok, the company's future may not look too rosy.
Most of the leading technology companies, despite an apparent slowdown in growth, maybe in relatively good shape. Their revenues are usually stable, and the biggest challenge is cost containment - hence the companies' announcements about layoffs and cost optimization, and focusing on their most profitable areas of business. According to CNBC, about 50% of technology companies are already planning to carry out layoffs, which appears to be related to the macroeconomic situation.
Rafał Tworkowski, Junior Market Analyst, Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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