Tech’s Biggest Companies Are Sending Worrying Signals About the Economy
Google this week reported a sharp decline in profit. Social media companies like Meta say that ad sales – the heart of their business – have quickly cooled. And Microsoft, perhaps the most trusted company in the tech industry, predict a slowdown at least until the end of the year.
Tech companies have guided the US economy over the past decade and boosted the stock market during the worst days of the coronavirus pandemic. Now, amid precarious inflation and rising interest rates, even Silicon Valley’s biggest giants are signaling that tough days may be ahead.
Companies are solving the same problems as the rest of the economy. Driven by aggressive consumer spending during the pandemic, they have invested to keep up with demand. Now, as spending is slowing, they are trying to adjust. It hasn’t been easy.
Amazon, which had 798,000 employees at the beginning of 2020, is innovating expansion its warehousing operations, mothball buildings, withdrawing from leases and delaying plans to open facilities. The company employed 1.52 million people in the second quarter, nearly 100,000 fewer than at the end of March.
Most companies want to meet the problems of technology industry leaders. Between them, Google and Microsoft made $31.5 billion in profits in their most recent quarter. On Thursday, Apple is expected to say that it made more than $20 billion in profit in a quarter, which would otherwise be seen as a disappointment.
But their sudden deceleration is revealing a weakness. The big tech companies haven’t really come up with a new, very profitable idea for years. Despite years of investing in new businesses, Google and Meta still rely heavily on advertising sales. The iPhone, 15 years after shutting down in the industry, still drives Apple’s profits.
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That has left some of them vulnerable to the disruptive upstarts they once were. YouTube, which is owned by Google, and Meta’s Facebook and Instagram social media platforms are being overseen by the much younger TikTok. Meta said Wednesday that its profit for the most recent quarter was more than 50 percent off from a year ago.
The downturn is deepening among companies in young markets like cryptocurrencies and the gig economy, but also tougher chipmakers. The value of Bitcoin has dropped by two-thirds this year, followed by a flurry of startups. Uber, a ride-hailing pioneer, has cut spending as investors lose patience with loss-making businesses.
Semiconductor companies are cutting spending on factories and machines as sales of PCs, smartphones and home appliances slow. Texas Instruments told financial analysts on Tuesday that the contagion is spreading to sales for things like heating controls and factory robots. The Covid-related lockdowns in China and the growing threat of trade and technology restrictions have made things worse.
“We’re in for a dark winter,” said Brent Thill, a technology analyst at investment firm Jefferies. “From small to large to large – no one is immune.”
Google and Microsoft assured investors this week that they will slow hiring and keep an eye on rising supply chain and energy costs. Apple said it plans to think more carefully about how to expand its workforce as the economy struggles.
Other companies are embarking on new strategies. Netflix, weakened by slowing subscriber growth, hopes to revive its business next month with release a lower price service subsidized by advertising.
Meta is pouring billions of dollars into building the so-called metaverse, which it hopes will be technology’s next big thing. But that investment is costing the company a lot of money. Meta says its Reality Labs division, which is responsible for virtual reality and augmented reality efforts at the heart of the metaverse, has lost $3.7 billion versus $2.6 billion a year earlier.
Mark Zuckerberg, chief executive of Meta, said on a call with financial analysts on Wednesday: “I understand that many may disagree with this investment. “But from what I can tell, I think this is going to be a very important thing, and I think it would be a mistake if we didn’t focus on any of these areas, the areas that I think fundamentally copy is important for the future. . “
For nearly three years, tech companies grew as businesses sent workers home and schools moved classes online. Fallout from Covid-19 serves as the industry’s strong point.
Staff and students using smartphones and computers. Businesses have supported remote work by purchasing cloud storage and video conferencing software. And those stuck at home use online shopping, which forces small businesses to pour money into digital advertising in the hopes of attracting potential customers.
Tech companies can’t sustain that growth rate. Sales of smartphones and computers are slowing down worldwide. Cloud spending is being scrutinized by businesses struggling due to a slowing economy. Shoppers have returned to stores and started spending money on travel, concerts and sporting events – the live moments they once sacrificed.
Apple is expected to report on Thursday that iPhone sales rose 7% in the financial year ending September, a sharp slowdown from the nearly 40% increase the company announced in 2016. last. Wall Street analysts predict that sales will fall next year as customers in their two biggest markets, the United States and China, grapple with an economic slowdown.
A similar boom in PC sales threatens to increase Apple’s woes, as well as drag its longtime rival Microsoft. The PC market is shrinking at its fastest rate in decades. The decline is hampering Apple’s Mac business and prompts Microsoft to forecast Windows sales to drop about 30% in the final months of the year.
“There are so many PCs bought in the last two years that there is no demand,” said Mikako Kitagawa, technology analyst at Gartner, a market research firm. “Plus, hiring is freezing, so businesses don’t need new computers.”
In the past, Microsoft has reduced sluggish PC sales by relying on the explosive growth of its Azure cloud computing product. But that business has begun to soften as cloud customers look to reduce spending.
Microsoft said on Tuesday that Azure sales were up 35%, a slowdown from earlier this year. Industry analysts expect Amazon, which reports earnings on Thursday, also say that the growth rate of its cloud computing business has slowed.
The industry downturn began with a decline in online ad sales. Rifts in that business began to form earlier this year when Apple introduced privacy changes that made it harder for Meta and Snap to target their digital ads. On Wednesday, Meta warned that it doesn’t see any relief in the dwindling ad market.
“We still have a lot of ways to go,” said Steve Milunovich, a longtime Wall Street analyst who now advises tech companies. “This reset is overdue.”
Report contributed by Karen Weise, Nico Grant, Don Clark and Ryan Mac.